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Series 
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ICIVIH 

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Canadian  Instituta  for  Historical  Microraproduction*  /  Institut  Canadian  da  microraproductioni  hittoriquaa 


©1995 


Technical  and  Bibliographic  Notes  /  Notes  technique  et  bibliographiques 


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filming  contract  apacificaliona. 


Original  copias  in  printad  papar  covara  ara  fllmod 
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aion.  or  tha  back  covar  whan  appropriata.  All 
othar  original  copiaa  ara  filmad  baginning  on  tha 
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<ion.  and  anding  on  tha  last  paga  with  a  printad 
or  illuatratad  imprassion. 


Tha  laat  racordad  frama  on  aach  microficha 
shall  contain  tha  symbol  —^  Imaaning  "CON- 
TINUED"!, or  tha  symbol  ▼  Imaaning  "END"), 
whichavar  applias. 

Mapa,  Plata*,  charts,  ate,  may  ba  filmad  at 
diffarant  raduction  ratios.  Thosa  too  larga  to  ba 
anilraly  includad  in  ona  axposura  ara  filmad 
baginning  in  tha  uppar  laft  hand  cornar.  laft  to 
right  and  top  to  bottom,  as  many  frama*  as 
raquirad.  Tha  following  diagrama  illustrata  tha 
msthod: 


Las  imagas  suivanta*  oni  *ta  raproduiias  avac  la 
plus  grand  soin.  compta  tanu  da  la  condition  *i 
da  la  nattat*  da  I'aiiamplaira  film*,  at  an 
conformita  avac  la*  conditions  du  contrst  da 
filmaga. 

Las  axamplairas  originaux  dont  la  couvartura  an 
papiar  aat  imprimOa  sont  filma*  %n  commancant 
par  la  pramiar  plat  at  an  tarminant  soit  par  la 
darniira  paga  qui  comporta  una  amprainta 
d'impra**ian  ou  d'illuitration,  soit  par  la  sacond 
plat,  aalon  la  eaa.  Tous  las  autras  axamplairas 
originaux  sont  filmte  an  commandant  par  la 
pramiira  paga  qui  compona  una  amprainta 
d'imprassion  ou  d'illu*tration  at  an  tarminant  par 
la  darnitra  paga  qui  comporta  una  talla 
amprainta. 

Un  daa  symbolaa  suivants  apparaitra  sur  la 
darniara  imaga  da  chaqua  microficha.  salon  la 
cas:  la  symbols  — »  signifia  "A  SUIVRE".  la 
symbol*  ▼  aignifia  "FIN". 

L**  cartaa.  planchaa.  tablaaux.  ate.  pauvant  atra 
film**  1  da*  taux  da  reduction  diffarants. 
Lorsqua  la  documant  aat  trop  grand  pour  atra 
raproduit  an  un  saul  clich*.  11  aat  film*  i  partir 
da  I'angla  supiriaur  gaucha.  da  gaucha  1  droita. 
at  da  haut  an  baa.  an  pranant  la  nombra 
d'imagaa  nOcassaira.  Las  diagrammaa  suivanta 
illustrsnt  la  mathod*. 


1 

2 

3 

1 

2 

3 

4 

5 

6 

MICROCOPY    RiSOlUTION   TEST   CHART 

(ANSI  and  ISO  TEST  CHART  No.  2l 


1.0 


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Modern  Business 


A    SKUIKS    OK    TEXTS    PKEI'AUl  1)    AS 

I'AKT    .)F  THE   MODERN  UrsiNESS 

COURSE  AND  SERVICE  01'  THE 

ALEXANDER    IIAAULTON 

INSTni'lE 


ALEXANDER  HAMILTON  INSTITUTE 
NEW  YORK 


Modern  Business 

KDITUE-IK-Clllcr 

JOSEPH    TREXCH   JOHXSON 

MAXAUINU    EDITUR 
KOLAND    P.    FaLKNER 

ASSOflATE    EDITORD 
T.    C0UU,T0»    noi,TO.V,    ItALHl,    D.    Fi.EMINO,    LeO    Ci.EENDI.I.NOL. 

CnABi,E8  W.  IIioD,  Theodore  H.  Rano-McNaliv 
''"'"""  •'■'""  Au,h,.n 

1.  »™.VE*,    A.ND    T„E    MaK J„,,.,,h    F„„,„    j„h„^„„ 

2.  EcoN.,.Mits  ,.,■   U„„j,E„ The  Kditors 

3.  OaoANizATioN   A.VD  Co.NTBOL   ....  Charlcs  W.  Gerstenberg 

4.  PLA.NT    M.-.NA«E.MEVT DextPF  S.   Kimball 

«.  Mabke'i'Imi  a.vd  Mebciia-vuisiho  .      .     .  The-  Kditors 

6.  Adve.tb'no    Pbisciples Herbert  F.  de  Bower 

T.  Salesmaash.p  «d  Sales  Mai(,\oeme»t.     Jolin  G.  Jones 
K.  Cbedit  ..nb  the  Credit  Max  ....     The   Editors 

f'.  ActouNTiNo  I'ai.vciPLEs The  Editors 

:r).  Co»T  Fi.ND..N>i Dexter  S.  Kimball 

U.  CoRPuaATioK  Finance William  H.  Waiitcr 

12.  nud:NE88  CoBBispoNDENCE Harrison  Mcjohnston 

13.  Adv>:btii,:xo   Campaioxs Mac  Martin 

14.  Inland  Taafpic Simon  J.  McLean 

15.  FoBEioN  Tb-vde  and  Shipping       ...     J.  Anton  de  Haas 

16.  BANKING  Principles  and  Practice  .     .     E.  L.  Stewart  Patterson 

17.  Domestic  and  Fobeion  Exchange   .     .     E.  L.  Stewart  Patterson 

18.  Inscbance The  Editors 

19.  Office  Management The   Editors 

20.  The  Exchanges  and  Specciation   .     .     Albert  W.  Atwood 

21.  AccoDNTiN'j  Practice  and  AunrriNG     .     ,Iohn   T.   Madde 

22.  Financial  and  Business  Statements    .     Leo  Greendlinger 

23.  Investment Edward  D.  Jones 

24.  CoMMiRciAi  Law Walter  S.  Johnson 


DOMESTIC   AND   I  OREIGN 
EXCHANGE 


BY 


E.  L.  STEWART  PATTERSON 

Hwpi linlt  inif  iif  tif  f-'tistt  rn  Toi'-iiyfiifi  ttrancfiei/, 
Vnnadian  Bank  of  Commerce 


MODEIiX  BUS JX ESS 

VOLUME  17 


.M-BXANDER  HAMPTON  INSTITUTE 
NEW  YORK 


C.3. 


corTViOHT,  1918,  1919,  bt 
ALEXANUEIl  lIAMII/rUN   INSTITUTE 

COFYBIGIfT   IN   GBKAT   BBITAIX,   1918,   lOl!',   BlT 

ALEXANDER  HAMILTON  INSTITUTE 


The  tille  and  coateoU  of  this  volume  as  well  aa  tha 
baaiopsii  srrowiDf  out  of  it,  are  further  prot^ctrd 
by  laws  relating  to  trade  marks  and  unfair  trade 
AH     rights     reserrpd.     inrliidine     translation     into 

Hcandioavian. 


R'pg-»tirtd  trad^  mark,  Rfff.  U.  S!    Pat,  Of.,  Umtf 
Regittrada,  M.  d«  F. 

Madb  rH  U.  S.  a. 


i 


PREFACE 


There  is  nothiiif.^  mysterious  m-  (iifliiiilt  about  for- 
eifju  exchaiifie  whtii  it  is  studied  in  the  HkIiI  of  domes- 
tie  exehanfje.  rtliieh  is  easily  understood,  and  in  tliis 
volume  I  havL-  endeavored  to  exi)lain  the  essential 
jjrineiples  of  both  domestie  and  l'()rei«n  exehanfje  in 
simple  lanjiuawe,  and  witii  suitable  illustrations.  In 
this  volume  praetieally  every  form  of  exehauKe  has 
been  dealt  with,  and  it  is  hoped  that  it  will  prove  use- 
ful to  the  exporter  and  imixirter,  as  well  as  to  I)usi- 
ness  men  in  general,  who  are  interested  in  the  general 
aspeets  of  the  subject. 

The  tables  dealing  with  gold  values  are  all  original 
calculations,  based  on  data  obtained  from  the  various 
mints,  while  for  some  of  the  silver  values  I  an.  in- 
debted to  Mr.  (;onzales'  excellent  little  book  "Mwl- 
ern  Foreign  Exchange,"  and  for  general  matter  to 
my  own  book,  "Notes  on  Foreign  Exchange." 

I  have  also  to  acknowledge  my  indebtedness  to  Mr. 

Major  I?.  Foster  for  va''iable  assistance  in  writing  the 

two  chapters  on  Domestic  Excliangc.  particularly  the 

second  chapter  dealing  with  the  exchange  situation  in 

J         the  United  States. 

E.  L.  Stewart  Patterson. 

Sherbrooke,  Que. 


i 


TAHLK  OF  CONTENTS 


1. 

2. 
!J. 
4. 
5. 
«. 
7. 

H. 

!). 
10. 
11. 
12. 


1. 

2. 
3. 
4. 
5. 
6. 
7. 
8. 
9. 
10. 


(  M.M'TEK  I 

noMKSTrc  i;x(ii.\n(;k 
Di-finitiim  i>f  Domestic  »n(l   Foni/fii   l"A(hanj;f 
I'nvimnts  hitwccn  Dcnv.  r  uiiil  Tuiii|m      . 

Clii'ok  on  Dihtor's  Hunk 

Cluck  or  Driift  on  Nrw  York  Bank 
Doniiind  for  Nch  \'ork  Kx<lmnKf  in  Denver 
Siipiily  of  .\cw  York  Kxdianj{o  in  D    iver 

An  Illustration 

Currcnov  Sliiprmnts 

Cost  of  .Now  York  Kxclmngc   .... 
Settlements  Thru  the  Sub-Treasuries  . 
Equilibrium  of  Demand  and  Supply   . 
Exclmngo  Viewed  as  a  Commodity 

(  HAPTKU  11 
FKnERAI.  HKSEKVH  BANK  CLEARINGS 
Collection  of  Country  Checks  .... 


Federal  Reserve  System 

Federal  Reserve  Clearing 

When  Proceeds  Are  Available  .... 
Member  Hanks  Maintain  Balances 
Indorsement  and  Presentation  of  Items     . 

Charges  for  Collection 

Rates  of  New  York  Clearing  House  Banka 

An  Illustration 

Advantages  and  Disadvantages      . 


1 
1 

2 

4 

r, 

6 

7 

!) 

12 

1.'} 

AH 


18 
19 
20 
21 
22 
23 
24 
25 
26 
28 


viii         DOMESTIC  AND  FOREIGN   EXCHANGE 
ncnoK 

11.  Success  of  the  System 'jj" 

12.  Gold  Settlement  Fund 30 


1. 

2. 

3. 

4>. 

5. 

6. 

7. 

8. 

9. 
10. 
11. 
12. 
13. 
14. 
15. 


CHAPTER  III 
GENERAL  A.SPECTS  OF  FOREIGN-  EXCHANGE 

Definition  of  Foreign  Exchange gj 

How  Indebtedness  Between  Two  Countries  Arises  32 

Similarity  Between  Inland  and  Foreign  Exchange  33 

Expense  of  Shipping  Gold 34 

Training  in  Foreign  Exchange 35 

Mint  Par  of  Exchan/re Qg 

Computing  the  Jlint  Par 37 

Par  of  Exchange     ...  ....  38 

Gold  Points 30 

Significance  of  Gold   Movements 40 

Actual  Gold  Points 4I 

War  and  Foreign  Exchange 41 

The  Clearing  Features  of  Foreign  Excliange     .  42 

Buying  and  Selling  Exchange 43 

New  York  Demand  for  Sterling  Exchange     .      .  44 


1. 
2. 
3. 
4. 
5. 
6. 
7. 
8. 
9. 
10. 


CHAPTER  IV 

RATES  OF  EXCHANGE 

Bills  of  Exchange  and  Their  Relation  to  Gold     .  46 

Cost  of  Sterling  Exchange 47 

Rates  of  Exchange 4g 

What  Makes  the  Rate         ....  '      !  49 

Coinage  Ra'io 5^ 

nuctuation  in  the  Rate  of  Exchange      .       .      .  5# 

Rates  Tend  to  Correspond 51 

Exchange   Quotations gg 

Range  of  the  Nine  Frequent  Quotations     ...  53 

Fixed  and  Movable  Exchange 54 


CONTENTS  ix 

8ICTI0N 

11.  Conversions •"i"; 

12.  Conversion  for  Fixed  Exchange 56 

13.  Conversion  for  Movable  Exchange  .  .  .  !  .  57 
1-i.  Simple  Arithmetic  Involved  ....  58 
15.  Exchange  Tables 59 

CHAPTER  V 

FOREIG.V  REMITTANCES 

1.  Non-Commercial  Exchange       ....  gi 

2.  Principles  Underlying  the  Issuance  of  Drafts      .  62 

3.  Advices -, 

4.  Specimen  Forms  and  Signatures 66 

5.  Cost  of  Drafts  to  Purchasers   .  cc 

6.  Travelers'   Checks    ••...'.'.'!.'  67 

7.  Payment  of  Checks '  ^^ 

8.  Payment  to  Holders .70 

9.  Redemption  of  Checks 71 

10.  Letter  of  Indication ^a 

11.  Lost  Travelers' Checks  .      .....  73 

12.  Letters   of  Credit ■      .  74 

13.  Payment  to  the  Holder  ......  .      .     gj 

14.  Circular  Notes 82 

15.  Foreign  Money  Orders gg 

16.  Payment  of  Orders .85 

17.  Mail  Remittances !  86 

CHAPTER  VI 

BILLS  OF  EXCHANGE 

1.  Bills  of  Exchange    ...  on 

2.  Sight  Drafts       ...  oX 

3.  Cable  Transfer. '.'.'.'  94 

4.  Unusual  Rates  for  Cables '      .  95 

5.  Long  Exchange og 


»  DOMESTIC  AND  J-OHEIGN   EXCHANGE 

SECTION 

6.  Influence  of  the  Interest  Rate ""g" 

7.  Comniercial  Long  Bills jqO 

8.  Bankers'  Long  Bills j^j 

9.  Bills  of  Exchange  that  Involve  More  or  Less  Risk  101 
10.  Letters  of  Credit jQg 

CHAPTER  VII 
A  DAY  IX  A.\  EXCHANGE  BOX 

1.  Practical  Exchange jOjj 

2.  Demand  Sterling  Sold Ijq 

3.  Sterling  Purchased jjj 

4.  French  Exchange jjo 

5.  (ierman  p^xchange jj3 

6.  Sundrj'  Drafts Iji 

7.  Travelers'  Checks Ug 

8.  Issue  of  a  Letter  of  Credit Ug 

9.  Payment  on  Letter  of  Credit ng 

10.  Payment  of  a  Travelers' Check 117 

11.  Commercial  Letters  of  Credit H7 

CHAPTER  VIII 
FOREIGN  EXCHANGE  AND  EXPOKTS 

1.  Interdependence  of  Exports  and  Imports        .       .  ISO 

2.  Origin  and  Supply  of  Foreign  Exchange  .      .       .  122 

3.  "The  United  States  in  Account  with  the  World"  124 

4.  Commercial  Bills  of  Exchange -[gg 

5.  Financing  Exports  by  Means  of  Dollar  Credits     .  130 

fi.     Dollar  Acceptances jgj 

7.     Export  Letters  of  Credit I34 

CHAPTER  IX 
FOREIGN'  EXCHANGE  AND  IMPORTS 

1.  Commercial   Letters  of  Credit   and   Importing    .    137 

2.  British  Acceptances  under  Letters  of  Credit   .       .    138 


CONTENTS  xi 

•ICTION  PAOl 

3.  History  of  the  Draft  in  London 139 

4.  Position  of  the  Obligants  on  the  Bill  ....  140 

5.  The  Part  London  Plays 141 

CHAPTER  X 

FINANCE  BILLS 

1.  Definition  of  a  Finance  Bill 144 

2.  Finance  Bill  for  New  York  Account  .      .      .      .14,5 

3.  Method  of  Using  Finance  Bills 146 

4.  Loan  of  a  Finance  Bill 148 

5.  A  Finance  Bill  on  London  Account       ....  149 

6.  Other  Uses  of  Finance  Bills 150 

7.  Forward  Exchange 161 

CHAPTER  XI 

ARBITRAGE 

1.     What  Is  Arbitrage? ,      .  155 

S.     When  Arbitrage  Is  Transacted 155 

3.  Parity I57 

4.  Parity  in  Stocks 158 

5.  Claim  Rule I59 

6.  Simple  Arbitrage 160 

7.  Compound  Arbitrage 168 

8.  Arbitrage  in  Gold 164 


S. 
3. 
4. 
5. 


CHAPTER  XII 

RATES  OF  INTEREST 

Interest  an  Important  Factor  in  Exchange  Quo- 
tations   166 

Long  Bills 166 

Bank  Rate 167 

Market  Rate ,.,...    168 

Retirement  Rate 169 


xii  DOMESTIC  AND  FOREIGN   EXCHANGE 

iionoif 

6.  Importance  of  the  Bank  of  England  Rate     .      .    169 

7.  What  the  Bank  of  England  Rate  EfTccts  .      .      .171 

CHAPTER  XIII 
GOLD  SHIPMEXTS 

1.  Gold  or  Specie  Points -i-^^ 

2.  Gold  Values,  London  nnd  New  York   ....  175 

8.  Gold  Shipments  from  New  York I7g 

4.     Gold  Shipments  from  New  York  to  Ottawa  .      .  177 

6.     Shipments  from  Ottawa j8q 

6.     Gold  Imports  During  the  War jgl 

CHAPTER  XIV 
STERLING  EXCHANGE 

I.     London  Market Ig^ 

8.     Monetary  System [    jgg 

3.  Paper  Money jg~ 

4.  Coinage  of  Gold !      .    188 

6.     Stamps  and  Interest jqq 

6.  How  London  Quotes  Exchange 190 

7.  Rates  of  Exchange iqj 

8.  Course  of  Exchange jgg 

9.  American   Quotations jgg 

10.  Conversion -jq- 

11.  Profits '    ,07 

12.  Purchase  of  Bills  of  Exchange  .      .....    198 


1. 

8. 
3. 


CHAPTER  XV 

FRENCH  EXCHANGE 

Paris  Market gOj 

Latin  Union gn-i 

A'lonetary  System 202 

Stamp  Duties  and  Interest gog 


CONTENTS  xiii 

"*"""•  .  not 

5.  How  Paris  Quotes  Exchange 204 

6.  French  Exchange  in  New  York 205 

7.  Fractional  Quotations 206 

8.  Profits (jQ-f 

9.  Purchase  of  French  Long  Bills 209 

CHAPTER  XVI 

GEKMA.N  KXCIIANGE 

1.  The  Berlin  Market 212 

2.  Monej 212 

3.  Stamp  Duties 213 

4.  Interest  Rates  and  Commercial  Usages   .      .      ,214 

5.  German  Quotations 216 

6.  American  Quotations 216 

7.  Conversions 217 

8.  Profits 019 

9.  Purchase  of  Gorman  Long  Bills 220 


1. 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

9. 
10. 
11. 
12. 
13. 


CHAPTER  XVII 

EXCHANGE  WITH  OTHER  COUNTRIES 

Gold  Basis  of  Exchange 222 

Dutch  Exchange 222 

Exchange  with  Other  Gold  Standard  Countries  .  224 

Exchange  Quotations 225 

Gold  Exchange  Standard 227 

Philippine  Islands 228 

I"'''* 228 

Argentina ^29 

Brazil 230 

Silver  Standard 23fK 

China 23S 

Paper  Currencies 23*^ 

Chile 236 


XXV 


I>OMESTIC  AND  FOREIGN   EXCHANGE 


CHAPTER  XVIII 

LONDON  AND  NEW  YORK  AS  FINANCIAL  CENTERS 

noTioii  p^ju 

1.  New  York  as  a  Financial  Center 238 

2.  The  Reasons  for  London's  Supremacy                     .  239 
8.     Physical  Conditions  Favorable  to  London              .  240 

4.     Mail  and  Cable  Facilities 241 

6.     Time  Advantages .      _  242 

6.  National  Characteristics .  248 

7.  Willingness  to  Seek  Fortune  Abroad  ....  244 

8.  London  Without  Rivals  at  Home 244 

9.  Influence  of  Custom  and  Tradition      ....  246 

10.  Economic  Factors  in  London's  Position   .  .  246 

11.  Free  Gold  Market 847 

12.  Liquid  Discount  Market 249 

13.  Mercantile  Nary  and  Tariff 251 

14.  England's  Foreign  Trade 2.52 

15.  New  York's  Present  Dominance  Temporary   .       .  254 

16.  New  York's  Future "    ,      .  256 


CHAPTER  XIX 

WAR  AND  THE  EXCHANGES 

1.  War  and  Its  Effect  on  International  Exchange  .   257 

2.  Moratoria 2,59 

3.  London  and  New  York 263 

4.  Gold  Shipments  from  New  York 263 

a.     Payments  Thru  Ottawa 263 

6.  New  York  Loans  to  Great  Britain 264 

7.  Great  Britain 265 

8.  Dutch  Exchange 268 

9.  Exchange  in  Other  Countries 269 

10.  New  York 271 

11.  Canada 274 


CONTENTS 

w 

•tCTlON 

12.     (Wmany        .      .      _      _  iMm 

la.     'J'lif  8cui,dinavian  Union     .' fl!? 

TABLES 

1-     ^'ah^^■s  of  Forci^  Coins 

■J-     Alonevs  in  Actual  Use                        ^^* 

4.      .Moner  Symbols                ~''^' 

Index        ".                   992 

203 


xvir— 2 


DOMESTIC  AND  FOREIGN 
EXCHANGE 


CHAPTER  I 

DOMESTIC  EXCHANGE 

1.  Definition  of  domestic  and  foreign  exchange. — 
Domestic  exchange  is  simply  the  term  apphed  to  the 
various  methods  of  making  payments  between  busi- 
ness men  in  different  communities  located  within  the 
same  country.  Foreign  exchange  refers  to  all  pay- 
ments made  by  the  business  men  of  one  country  to 
those  of  another  country.  An  example  of  domestic 
exchange  is  furnished  when  Jones  of  Denver  pays  a 
debt  to  Smith  in  Toledo  or  to  Swann  in  Tampa. 
Foreign  exchange  is  involved  when  he  remits  to 
McDonald  in  Montreal  or  to  Lubin  in  Paris. 

2.  Payments  between  Denver  and  Tampa. — Sup- 
pose Jones  in  Denver  buys  $1,000  worth  of  grape 
fruit  from  Swann  in  Tampa.  He  may  make  pay- 
ment in  any  one  of  various  ways.  He  may  send  bills 
in  a  registered  letter,  gold  or  currency  by  express,  an 
express  money  order,  a  postal  money  order,  a  check 
on  his  own  bank  in  Denver  or  elsewhere  or  a  draft 
dra^vn  by  his  own  bank  on  some  other  bank.  To  send 
cash  by  registered  letter  or  express  or  to  send  a  money 


DOMKSTK'  AM)  FOUKKiN   KXfllANGE 


order  is  too  expensive  and  1ms  other  disadvantages. 
Swaiiri  would  lie  perfeetly  satisfied  with  a  eheek  or 
bank  draft  on  his  own  bank  or  any  bank  in  Tampa. 
How  is  Jones  to  ^et  sueh  an  instrument  ?  He  has  no 
hanking  eonnections  in  Florida,  neither  has  his  Den- 
ver bank.  There  are  over  twenty-seven  thousand 
bankin--  institutions  in  the  Tnited  States.  It  is  not 
reas(mal)le  to  expect  any  one  bank  to  maintain  rela- 
tions with  all  of"  them  or  even  with  one  in  each  city. 
In  nearly  all  cases  it  is  impossible  for  a  debtor  to 
remit  a  draft  or  cheek  on  a  bank  in  the  creditor's 
city. 

3.  Check  on  debtor's  bank. — Jones  may  simply 
draw  a  check  on  his  Denver  bank  and  mail  that  to 
Swann.  This  is  convenient  for  Jones,  but  how  about 
Swann  ?  lie  gets  a  right  to  receive  $1,000  in  Denver. 
He  wants  it  in  Tan.pa,  not  in  Denver.  He  must  now 
undergo  all  the  trouble  and  expense  and  delay  of  coU 
lecting  it.  This  can  be  shifted  to  the  Tampa  banker 
by  depositing  the  check,  but  the  bank  makes  a  charge 
for  this  service.  The  amount  of  commission,  or  "ex- 
change," charged  in  such  a  case  depends  upon  the  size 
of  the  check  and  the  trouble  involved  in  collecting  it. 
If  Swann  is  a  very  important  customer  of  the  bank, 
he  may  receive  full  credit  for  the  check  deposited,  the 
bank  assuming  the  entire  burden  of  collection. 

A  debtor  imposes  an  unreasonable  burden  upon  his 
creditor  or  his  creditor's  bank  whenever  he  remits  a 
check  on  his  own  local  bank.  When  Jones  buys  grape 
fruit  he  has  a  definite  understanding  that  the  price 


no.MKSTic  f.xcman(;k  b 

quoted  is  citlu  r  for  "f.o.h.  Tampa"  or  for  delivery  in 
Denver.  There  should  he  just  sueli  an  understanding 
with  regard  to  the  payment.  A  l)uyer  is  ol'ten  re- 
quested to  a(hl  a  eertain  amount  to  tlie  priee  ([uoted  if 
he  wishes  to  remit  hy  eheek  on  his  own  l)ank. 

Tlie  lar^e  numher  of  wholly  independent  hanks  in 
the  I'nited  St.ites  makes  the  eolleetion  of  out-of-town 
eheeks  ofter  .  slow  proeess.  \aturally.  the  depositor 
eannot  expeet  to  j-et  the  use  of  his  funds  until  they 
have  heen  eolleeted  hy  the  hank.  The  delay  involvcil. 
coupled  with  the  hif>h  eolleetion  charfre,  usually  causes 
a  discrimination  to  he  made  ajjainst  remittances  in  the 
form  of  h)cal  checks.  This  discrimination  may  he- 
come  so  great  .is  to  render  the  use  of  such  checks  pro- 
hihitive.  When  this  is  true,  the  dehtor  is  forced  to 
apply  to  his  hank  for  a  draft  which  will  he  acceiitablo 
in  the  city  where  the  amount  is  to  he  paid. 

Plainly,  it  would  he  impossihie  for  each  hank  to 
keep  balances  in  every  other  city  in  the  country.  It 
would  he  highly  desirable  for  every  bank  in  the  coun- 
try to  be  able  to  sell  drafts  on  some  one  city.  To  do 
this  they  would  be  compelled  either  to  keep  funds  on 
deposit  with  some  bank  in  the  central  city  or  to  keep 
balances  with  another  bank  that  did.  In  either  case, 
each  of  the  two  banks  maintaining  this  relationshii)  is 
called  the  "correspondent"  of  the  other.  If  all  the 
banks  are  attempting  to  maintain  balances  in  some 
central  city,  it  is  evident  that  they  will  always  be  will- 
ing to  accept  on  deposit  drafts  or  checks  d"  -vn  against 
the  banks  of  that  city;  for  thev  can    >,.     in  these 


4    DOMESTIC  AND  FOREIGN  EXCHANGE 

drafts  and  checks  and  deposit  them  with  their  corre- 
spondents for  credit,  thus  building  up  their  balances. 
4.  Cluck  or  draft  on  Xew  Vork  bank.— ^tw  York 
is  the  city  on  which  drafts  are  drawn  for  making  pay- 
ments between  different  communities  in  the  United 
States.     It  was  not  necessary  that  the  banks  of  *he 
country  should  get  together  and  arbitrarily  decide  to 
make  New  York  a  central  city;  it  was  not  a  matter  of 
chanr-       New  York  is  naturally  the  commercial  as 
well  a     he  financial  center  of  the  country.     Merchants 
in  every  community  are  constantly  buying  goods  from 
New  York  to  an  extent  that  is  greater  than  the  pur- 
chases from  any  other  city.     More  payments  are  made 
to  New  York  than  to  any  other  city.     Consequently, 
New  York  is  the  city  on  which  all  thj  banks  of  the 
country  usually  sell  drafts. 

Not  only  are  payments  to  New  York  made  in  Xew 
York  exchange,  but  payments  between  different  cities 
thruout  the  country  are  made  in  the  same  way.  Den- 
ver remits  to  Tampa  by  using  a  draft  on  some  Xew 
\  ork  bank.  The  Tampa  bank  is  willing  to  accept  the 
draft  because  it  knows  that  it  will  have  a  call  for  Xew 
York  exchange.  The  draft  is  forwarded  to  Xew 
\  ork  for  credit  against  which  the  Tampa  bank  can 
draw. 

5.  Demand  for  New  York  exchange  in  Denver.— 
New  York  exchange  may  be  looked  upon  as  a  com- 
modity which  is  bought  and  sold  like  wheat  or  corn. 
It  IS  really  the  right  to  money  in  Xew  York.  It  has 
a  value  which  fluctuates  from  time  to  time  just  as  the 


DOMESTIC  EXCHANGE 


value  of  wheat  does.     To  understand  thflse  '•hanges  in 
value  it  is  necessary  only  to  examine  the  conditions 
affecting  the  demand  for  and  supply  of  the  exchanKc. 
Using  Denver  still,  for  example,  what  is  it  that 
gives  rise  to  a  demand  for  New  York  exchange  in 
Denver?     In  other  words,  what  causes  business  men 
in  Denver  to  want  a  right  to  money  in  New  York ! 
The  answer  is  simple.     VVhcever  a  business  man 
there  buys  goods  from  New  York,  he  needs  New  York 
funds  for  making  payment.     Likewise,  whenever  he 
buys  go<Kls  from  any  city  in  the  United  States  lie  is 
more  than  likely  to  remit  in  New  York  ex  hange,  be- 
cause he  finds  that  to  be  most  acceptal)le.     Of  course, 
the  man  in  Denver  does  not  cnrrv  an  account  with  any 
New  York  bank.     He  gets  his  Denver  hank  to  give 
him  a  draft  on  some  New  York  bank  in  exchange  for 
his  check. 

When  it  is  taken  into  account  that  New  York 
checks  and  drafts  are  being  used  in  this  way  ei  ■  ry 
day  for  the  cancelation  of  debts  in  all  ,,arts  of  the 
United  States,  it  will  be  readily  understood  whv  New 
York  exchange  is  deservedly  called  "the  business 
man's  money. " 

6.  Suppli/  of  Xero  York  exchange  in  Denver.— We 
may  now  imiuire  into  the  way  Denver  banks  get  their 
power  to  sell  dmfts  on  New  York  banks.  How  do 
they  establish  balances  in  New  York  against  which  to 
sell  exchange!'  Their  balances  are  established  and 
maintained  in  three  ways.  First,  whenever  a  Denver 
business  man  sells  goods  to  someone  in  New  York,  or 


6    DOMESTIC  AND  FOREIGN  EXCHANGE 

in  any  other  city  in  the  United  States  for  tliat  matter, 
he  is  most  likely  to  receive  a  draft  on  \ew  York  in 
payment.  This  draft  he  deposits  with  his  local  bank. 
His  bank  sends  it  to  its  correspondent  in  New  York 
and  thus  builds  up  its  balance  there.  Denver's  sup- 
ply of  New  York  exchange,  or  right  to  money  in  New 
York,  is  built  up  then  when  Denver  sells  goods  to 
other  cities  and  receives  New  York  drafts  in  payment. 
The  second  way  is  to  ship  cash  to  New  York.  The 
third  is  to  borrow  tiiere  and  leave  the  proceeds  on  de- 
posit. Of  course,  cash  or  drafts  must  be  sent  finally 
to  extinguish  the  debt. 

It  is  not  necessary  for  the  Denver  bank  to  carry  a 
balance  in  New  York  in  order  that  it  may  sell  New 
York  exchange.  It  may  maintain  a  deposit  with 
some  other  bank,  say  in  Chicago,  or  in  St.  Louis,  which 
does  kecj)  a  New  York  balance.  In  such  a  case  it 
uses  blank  'Sew  York  drafts  furnished  by  its  Chicago 
cor-espondent. 

7.  v/n  illiistration.—We  will  suppose  that  the 
Rocky  Mountain  Bank  of  Denver  has  on  deposit  $50,- 
000  with  the  First  National  of  Chicago.  Now  sup- 
pose that  a  Denver  house  has  sold  ore  in  Baltimore 
and  has  received  in  payment  a  draft  for  $10,000  nn 
the  Corn  Exchange  Bank  of  New  York.  The  Den- 
ver house  will  deposit  the  draft  in  the  Rocky  Moun- 
tain Bank,  which  will  send  it  to  its  Chicago  corre- 
spondent, thereby  increasing  its  balance  to  $G0,000. 
The  Chicago  bank  will  send  the  draft  to  its  corre- 
spondent in  New  York,  say  the  National  City  Bank, 


DOMESTIC  EXCHANGK 


and  so  increase  its  balance  by  $10,000.  The  National 
City  sends  the  draft  thru  the  Clearing  House  and  it 
is  finally  canceled  at  the  Corn  Exchange.  The  Corn 
Exchange  debits  the  account  of  the  Baltimore  bank 
which  originally  drew  the  draft. 

By  an  agreement  with  the  First  National  Bank  of 
Chicago,  the  Rocky  Mountain  Bank  is  able  to  sell 
drafts  on  the  National  City  Bank  of  New  York,  us- 
ing for  the  purpose  blank  drafts  furnished  by  the  First 
National.  Jones  comes  in  to  get  a  $1,000  draft  to 
pay  Swann  for  his  grape  fruit.  He  draws  liis  check 
for  the  amount,  turns  it  over  to  the  bank,  receives  a 
draft  and  sends  it  to  Swann.  Swaim  deposits  it  with 
his  Tampa  bank,  which  sends  it  to  its  correspondent 
in  New  York.  If  the  correspondent  is  not  the  Na- 
tional City  Bank,  it  sends  the  check  tliru  the  Clearing 
House  to  the  National  City,  which  debits  the  First 
National  of  Chicago.  The  First  National,  in  turn, 
debits  the  Kocky  Mountain  and  the  matter  is  closed. 

Thus  the  Denver  bank,  and  every  other  bank  in  the 
United  States,  has  a  constant  demand  for  New  York 
exchange  and  a  constant  supply  of  it. 

8.  Ciirrenci)  shipments.— \\h\h  in  the  long  run  the 
business  men  of  Denver  buy  from  other  cities  about  as 
much  as  they  sell  to  them,  it  would  be  a  rare  coinci- 
dence if  the  amounts  should  be  exactlv  equal.  Dur- 
ing April,  ^lay  and  June  almost  any  western  city  is 
likely  to  be  buying  more  than  it  is  selling.  Moreover, 
the  demand  for  circulation  is  low  at  that  time  ia 
the  West.     Consequently,  funds  are  freed  for  tern- 


Hi 

il 


H  DOMESTIC  AXD  FOREIGN  EXCHANGE 

porary  investment  in  the  East.  Most  of  the  surplus 
funds  are  sent  to  Xew  York  and  Chicago  to  be  loaned 
at  call.  Whether  funds  are  sent  away  to  pay  for 
goods  or  to  invest,  there  is  a  demand  for  Xew  York 
exciiange.  At  such  a  time  western  banks  may  sell 
drafts  until  their  New  York  balances  are  exhausted. 
They  must  then  ship  currency  to  New  York  if  they 
wish  to  maintain  their  balances  so  as  to  be  able  to  con- 
tinue selling  drafts. 

From  July  to  October  the  tabk  s  are  turned.  West- 
erners are  selling  the  rest  of  the  countrv  more  than 
tlicy  are  buying.  Banks  in  the  AVest  have  more  New 
^  ork  drafts  offered  to  ti.em  than  thev  are  called  upon 
to  sell.  Consequently,  they  pile  up  balances  in  Xew 
i  ork.  At  the  same  time,  thev  have  rather  heavy  de- 
mands from  depositors  for  cash  to  satisfv  the  needs 
for  circulation.  They  may,  accordingh%  call  upon 
New  York  to  send  them  cash.  There  is  no  reason  for 
eaving  surplus  funds  in  New  York  unless  thev  can 
be  loaned  there  at  higher  rates  than  thev  wilfcom- 
niand  in  the  West.  The  usual  practice  in  the  autumn 
months  is  to  call  for  cash. 

Any  particular  bank,  therefore,  sometimes  has  oc- 
casion to  purchase  more  New  York  exchange  than  it 
needs  to  sell,  or  it  has  a  demand  for  more  than  it  buys 
or  receives  on  deposit  from  its  customers.  Unless 
the  country  bank  wishes  to  shift  its  balance  from 
a  New  York  bank  to  some  other  bank,  it  will  be 
necessary  to  make  a  shipment  of  currencv  when  its 
balance  piles  up.     When  its  balance  is  large  enough 


DOMESTIC  EXCHANGE  9 

it  will  accept  deposits  of  drafts  on  Xew  York  only 
with  the  intention  of  shipping  back  cash.  When  its 
Xew  York  balance  is  depleted,  it  will  sell  drafts  with 
the  knowledge  that  it  must  ship  currency  to  New 
York  to  cover  the  amount 

9.  Cost  of  New  York  exchange.— The  shipment  of 
currency  mvolves  expense,  and  it  is  not  likely  that  a 
bank  will  accept  superfluous  Xew  York  exchange  un- 
less It  receives  a  fee  which  will  cover  the  cost  of  collect- 
ing the  dn   t  in  cash.     Neither  will  it  sell  exchange 
when  Its  yew  York  balance  is  depleted  and  when  the 
sale  means  that  currency  must  be  shipped,  unless  it 
receives  a  fee  large  enough  to  cover  the  cost  of  ship- 
ment.    This  cost  depends  upon  three  items:  first, 
the  express  charge:  second,  insurance;  and  third,  the 
loss  of  interest.     The  charge  for  transportation  is 
usually  combined  with  the  charge  for  insurance  by  the 
express  company.     The  moment  the  New  York  bank 
delivers  the  cash  to  the  express  company  for  shipment 
to  the  country  bank  upon  its  order,  it'  ceases  to  pay 
interest  on  that  sum.     On  the  other  hand,  the  country 
bank  cannot  loan  againf    jurrency  in  transit  to  New 
York.     The  country  bank  loses  interest  and  pays  all 
charges  on  shipments  both  ways. 

The  cost  of  shipping  gold  between  New  York  and 
some  of  the  other  centers  is  about  as  follows: 

C'>"<^«g°    $0.50  per  thousand  dollare 

f,*-  J^°"'s   0.60  per  thousand  dollars 

New  Orleans 0.75  per  thousand  dollars 

San  Francisco 1.30  per  thousand  dollars 


10        DOMESTIC  AND  rOREIGN  E..CHANGE 

Assuming'  tlie  cost  of  shipment  between  Denver  and 
Xew  York  to  be  one  dollar  per  $1,000,  a  Denver  bank 
must  receive  at  least  $1,001  for  a  $1,000  draft,  when 
the  sale  of  that  draft  necessitates  a  shipment  of  gold  to 
Xew  York.     On  tlie  otlier  hand,  it  will  pav  not  over 
$999  for  a  $1,000  draft  when  the  i)urchase  means  that 
a  superfluous  balance  will  be  built  up  in  Xew  York 
and  that  the  draft  must  be  collected  by  a  shipment  of 
f,'old  from  Xew  York.     On  small  amounts  the  fee  may 
be  more  than  one  dollar  each  way ;  but  the  cost  of  Xew 
York  exchan|Te  in  Denver  cannot  vary  far  from  within 
the  limits  of  $999  and  $1,001  because  of  competition 
between  the  banks.     As  soon  as  it  goes  beyond  these 
limits,  a  profit  can  be  made  l)y  shipping  gold  one  way 
or  the  other,  and  it  is  almost  certain  that  some  bank 
will  take  advantage  of  the  situation.     If  one  bank 
lowers  the  exchange  charge,  others  must  follow  suit 
or  lose  their  customers,  with  some  loss  of  good-will  at 
the  same  time. 

Banks  do  not  hold  off  from  making  exchange 
charges  until  the  sale  or  purchase  of  further  drafts 
means  an  actual  shipment  of  gold  to  or  from  Xew 
York.  As  soon  as  the  demand  for  exchange  begins  to 
exceed  the  supply,  i.e.,  as  soon  as  a  tendency  to  ship 
gold  to  Xew  York  appears,  the  exchange  diarge  or 
price  of  exchange  is  raised.  How  far  the  price  will 
rise  depends  upon  the  seriousness  of  the  situation  as 
riew^d  by  the  various  banks.  If  one  banker  thinks 
the  increase  in  demand  is  only  temporary  and  that 
actual  shipment  will  not  be  necessary,  ha  wiil  raise  the 


DOMESTIC  EXCHANGE  n 

price  only  to  a  slight  extent.  Other  banks  must  offer 
exchange  at  as  low  a  price  as  he  does,  or  they  will  lose 
business.  The  same  principles  apply  when  supi)ly  is 
outrunning  de.nan.l.  The  price  is  then  dropped  be- 
low par,  the  exact  amount  of  the  drop  being  regulated 
■v  competition  between  the  banks.  As  was  shown 
above,  the  price  or  rate  of  exchange  can  i.i  no  case 
drop  tar  below  $999  or  go  far  above  $1,001. 

It  should  be  borne  in  mind  that  the  ordinary  quoted 
rates  of  exchange  apply  only  to  large  amounts.  Tlie 
mdividual  who  goes  to  a  bank  with  a  small  draft  to  sell 
-lay  get  a  price  below  par  wlien  tlie  (pioted  rate  is  par 
<.r  even  above.  As  a  matter  of  fact,  many  banks  al- 
ways buy  and  sell  exchange  at  par  when  dealing  witii 
their  regular  customers,  especially  their  most  impor- 
tant customers,  unless  the  amount  involved  in  a  single 
transaction  is  large.  The  rate  paid  by  an  individual 
on  a  small  draft  may  have  httle  or  no  relation  to  the 
current  movement  of  exchange. 

It  is  the  large  cfincerns  and  the  banks  wiiicii  buy 
and  sell  exchange  at  the  quoted  rates.  Thev  de-il  iii 
large  sums.  A  bank  in  Chicago  may  exhaust  its  bal- 
anc^  in  New  York.  If  it  is  to  sell  more  drafts  it  must 
mild  up  Its  deposit.  This  is  usually  done  in  one  of 
three  ways:  by  shipping  gold  to  New  York;  borrow- 
ing m  New  York  and  leaving  the  proceeds  on  deposit- 
or buying  exchange  from  some  other  bank,  'i'he  last 
method  is  generally  preferred  so  long  as  exchange  can 
be  bought  under  $1,000..50  (fifty  cents  being  the  ship- 
pmg  cost).     It  is  possible  sometimes  to  buy  at  as 


12        DOMESTIC  AND  FOREIGN  EXCHANGE 

low  a  rate  as  $999.50.  In  Chicago  and  other  impor- 
tant inland  cities  there  are  men,  called  exchange 
brokers,  who  do  nothing  but  buy  and  sell  New  York 
exchange  for  the  banks. 

10.  Settlements  thru  the  sub-treasuries. — The  cost 
of  shipping  currency  from  one  city  to  the  other  is  fre- 
quently saved  to  the  banks  by  the  t'ederal  treasury. 
For  a  good  many  years  payments  between  the  treas- 
ury at  Washington  and  the  sub-treasuries  in  the  vari- 
ous large  cities  were  all  made  by  cash  shipments.     It 
happened  very  frequently  that,  at  the  same  time  the 
treasury  was  forwarding  considerable  sums  of  cash 
between  two  cities,  the  banks  would  be  shipping  cur- 
rency in  the  opposite  direction.     Early  in  the  seven- 
ties an  ingenious  cashier  in  New  Orleans  suggested  to 
Secretary  of  the  Treasury  JSIcCuIlough  that  a  saving 
both  to  the  government  and  to  the  banks  might  be  ef- 
fected if  the  banks,  when  they  wished  to  transmit 
money  to  a  city  in  which  a  sub-treasury  was  located, 
would  ascertain  whether  the  government  at  the  same 
time  did  not  wish  to  send  money  in  the  opposite  direc- 
tion.    If  this  proved  to  be  the  case,  it  would  be  profit- 
able to  the  banks  and  to  the  government  to  allow  the 
banks  to  deposit  the  money  in  the  Teasury  and  receive 
an  order  upon  the  Treasury  in  the  other  city.     The 
Treasury  office  in  the  first  city  would  receive  the  cur- 
rency it  required  from  the  depositing  bank,  and  tlie 
bank  in  the  other  city  would  receive  the  currency  from 
the  Treasury  instead  of  from  its  correspondent  and  all 
cost  of  transporting  money  would  be  eliminated. 


DOMESTIC  EXCHANGE  is 

11.  Equilibrium  of  demand  and  supply. —The  pre- 
mium or  discount  on  domestic  exchange  is  published 
in  the  principal  dailies  and  is  useful  to  the  business 
man  as  indicating  the  volume  and  direction  of  trade 
at  any  particular  time.  An  unusually  high  or  an  un- 
usually prolonged  premium  on  Xew'Vork  exchange 
will  indicate  that  the  purchases  of  local  merchants 
have  been  unusually  heavy  in  that  year,  if  there  are 
no  extraordinary  transactions  to  affect  the  price  of 
exchange. 

Why  does  it  not  happen  that  under  certain  circum- 
stances a  community  may  buy  more  goods  than  it  sells 
during  any  particular  period  and  thus  be  forced  tf) 
part  with  all  its  currency  in  settling  the  balance? 
Since  each  trader  is  simply  looking  out  for  his  own 
private  profit  and  does  not  concern  himself  with  the 
question  of  the  amount  of  currency,  there  seems  to  be 
no  reason  why  a  commimity  might  not  be  drained  of 
Its  currency.  This  brings  up  the  question  of  the 
balance  of  trade,  the  principles  of  which  are  the  same 
whether  the  exchange  of  goods  is  between  two  sepa- 
rate nations  or  between  two  localities  within  the  same 
nation. 

Suppose  for  any  reason  that  there  should  be  an 
unusually  heavy  purchasing  of  goods  by  the  mer- 
chants of  a  western  state  in  any  particular  year.  The 
merchants  would  buy  from  the  banks  New  York 
exchange  with  which  to  pay  their  bills.  The  banks, 
after  having  exhausted  their  credits  in  New  York, 
would    be    obliged   to    ship    currency    in    order   to 


ii 


U        DOMESTIC  AND  FOREIGN  EXCHANGE 

cover  the  drafts  on  New  York   sold  to  the  mer- 
chants. 

Despite  this  possibility,  there  is  never  any  danger 
that  a  community  will  be  stripped  of  its  money  or 
cash  as  a  result  of  its  purchases  of  goods  from  other 
communities.     No  matter  how  freely  Chicago  and  the 
country  tributary  to  it  may  purchase  goods  from  the 
East,  those  purchases  ran  never  make  any  serious 
drain  upon  tlie  cash  supply  of  Chicago.     No  matter 
how  extravagant  the  people  of  the  West  may  be,  their 
purchases  of  eastern  goods  can  never  be  greatly  in  ex- 
cess of  their  sales  to  eastern  customers.     Should  the 
people  of  Chicago  for  extraordinary  reasons  at  any 
time  increase  their  purchases  from  New  York  and 
other  eastern  cities,  the  first  effect  in  Chicago  would 
be  an  increase  in  the  demand  for  New  York  exchange 
and  in  bank  shipments  of  currency  from  Chicago  to 
New  York.     The  loss  of  currency  from  Chicago,  since 
rt  would  reduce  the  lending  power  of  Chicago  banks, 
would  tend  to  cause  a  rise  in  the  rate  of  interest  and  a 
rise  in  the  value  of  money.     The  prices  of  certain  com- 
modities would  begin  to  decline;  not  of  all  commodi- 
ties, but  of  those  which  are  subject  to  speculation, 
such  as  stocks,  wheat,  corn  and  pork.     Most  of  the 
speculators  in  these  articles  are  borrowers,  and  the  in- 
terest they  pay  is  an  important  item  in  the  expenses  of 
fteir  business,  so  that  when  the  interest  rate  rises  they 
are  obliged  to  contract  their  operations.     Chicago 
would  thus  become  a  good  place  to  lend  in  and  also  a 
good  place  in  which  to  buy  stocks  and  bonds,  wheat 


DOMESTIC  EXCHAMJK 


15 


and  other  speculative  commodities.  In  other  words, 
the  value  of  money  woulil  rise  in  Chicajfo,  and  j)eople' 
in  other  parts  of  the  country  would  increase  their 
purchases  in  Chicajro  markets,  reniittiuK  \cw  York 
exchanj^e  in  payment,  and  the  price  of  «oods  would 
fall.  The  reader  nuist  not  suppose  that  these  chanf,'cs 
in  price  or  in  the  rate  of  interest  need  he  so  ^rreat  as 
to  attract  general  attention.  Nevertheless,  it  cannot 
i)e  douhted  that  such  chanjfes  do  take  place,  and  that 
as  a  result  the  sales  of  Chicago  to  other  parts  of  the 
country  are  so  adjusted  that  in  the  long  run  they 
furnish  a  supply  of  Xew  ^'ork  exchange  ccjual  to  the 
demand. 

Thus,  it  happens  thruout  the  country  that  in  the 
course  of  a  year  the  dehts  of  every  community  are 
always  practically  balanced  by  its  credits  on  account 
of  sales,  so  that  large  shipments  of  currency  are  never 
necessary.  Indeed,  if  our  monetary  and  banking  sys- 
tems were  perfect,  shipments  of  currency  from  one 
part  of  the  country  to  another  would  seldom  occur  as  a 
necessary  result  of  trade  transactions.  Money  or 
currency  would  be  shipped  to  a  comnumity  only  as  a 
result  of  increasing  need  for  it  as  a  local  medium  of 
exchange  or  as  a  basis  for  the  expansion  of  bank  cred- 
its. In  Canada,  for  example,  on  account  of  the  elas- 
ticity of  its  bank-note  circulation,  seasonal  variations 
in  the  demand  for  currency  are  easily  provided  for  by 
the  chartered  banks  and  their  branches. 

12.  Exchange  vierted  as  a  com mndifi/.— The  easiest 
way  to  understand  exchange,  whether  (lomestic  or  for- 


'.■!ll| 


16 


DOMESTIC  AND  FOREIGN  EXCHANGE 


eign,  is  to  look  upon  it  as  a  commodity.  Instead  of 
thinking  of  the  rate  of  exchange,  think  of  the  price  of 
It.  Remember  that  ercJiange  on  New  York  or  on 
London  means  the  right  to  money  there.  To  ask 
What  is  the  rate  of  New  York  exchange  in  Chicago^ 
IS  the  same  as  to  ask.  How  much  must  one  pay  in 
Chicago  for  the  right  to  $1,000  in  New  York' 

The  rate  or  price  of  exchange,  like  the  price  of  any 
commodity,  is  determined  by  the  interaction  of  the 
demand  for  and  the  supply  of  exchange.     To  under- 
stand changes  in  the  rate,  it  is  necessary  to  understand 
the  forces  of  demand  and  supply.     Demand  for  New 
York  exchange  in  Chicago  originates  whenever  a  busi- 
ness man  m  Chicago  or  its  tributary  commimities  buys 
goods  elsewhere  and  seeks  to  remit  by  a  draft  on  New 
York.     Supply  originates  when  a  business  man  in  one 
community  sells  goods  elsewhere  and  receives  New 
\  ork  drafts  in  payment.     The  demand,  then,  varies 
roughly  with  the  purchases  of  goods  in  other  com- 
munities; the  supply,  with  the  sales  of  goods  to  other 
communities.     The  rate  or  price  of  exchange  tends 
to  rise  when  the  demand  outruns  the  supply,  and  to 
fall  when  the  supply  outruns  the  demand.     There 
are  certain  limits  to  the  extreme  fluctuations  in  the 
rate     It  cannot  go  higher  than  par  by  an  amount 
greater  than  the  cost  of  shipping  gold  to  New  York, 
nor  lower  than  par  by  an  amount  greater  than  the 
cost  of  shipping  gold  from  New  York.     The  upper 
and  lower  points  may  be  called  the  gold  shipment 
points;  that  is,  the  points  where  a  wider  swing  in  the 


DOMKSTIC  exciian(;k 


17 


rate  of  exchange  makes  roIcI  sl.ip.nent  profitable. 
V  lewed  ,n  this  way.  as  a  cnm.o.iitv.  exchaoKc  is 
extremely  simple.  The  sa.ne  principles  applV  i„ 
ore.«„  exchanKe,  with  a  few  complications  ,lue  to  the 
fact  that  payments  are  made  aeross  national  honn.I- 
ary  Imes.  In  foreign  payments,  only  «.,1,1  can  I.e  usc.l 
lor  setthng  balances.  A  simple  pn.blem  in  aritbn.etic 
arises  because  of  the  fact  that  the  cinagc  units  of 
different  nations  sometimes  vary  from  one  another  in 
the  amounts  of  pure  gold  which  thcv  contain  Then 
certain  arbitrary  measures  are  einidoyed  often  to  in- 
fluence international  movements  of  gold.  These  are 
seldom  resorted  to  in  domestic  exchange. 

RF.VIEW 

In  wl.at  ways  may  payment  be  made  f„r  ^oods  sold  by  a  mer- 
chant in  one  city  to  a  consumer  in  another-    \\1„.  ,       1 1 

hhow  by  an  illustration  the  course  of  a  draft 


M 


CIIAPTKR  II 

FEDERAL  KESEHVE  HANK  (  I.EARINT.S 

1.  Collection  of  i-ountn,  c/,,r/.,.-Tl,e  r„un,l  almut 
meth<.,J.s  by  wind,  banks  i„  the  lJnitc-,1  States  eclleet 
out-o  -t„wn  cheeks,  that  is,  eheeks  .,„  bunks  m  dif- 
ferent e«n..n,initics.  have  bee.i  mentioned  in  the  pre- 
cedmK  chapter.  Few  people  realise  the  deplorable 
waste  m  tnne.  money  and  labor  which  exists  ur.der 
our  collection  system. 

The  writer  knows  of  a  typical  example  of  what 
".ay  J'"P!>en.     A  youn^  .nan  drew  a  check  on  a  bank 
'"^^P-rt.  le..nessee.  and  deposite.l  it  with  a  bank 
m  Ithaca.  .\ew  York,  aski..^  the  banker  to  r.li  v 
hm.  as  soon  as  the  funds  becan.e  available.  inasn.,.cl, 
as  he  was  «o,ng  to  need  some  money  within  a  few 
dajs.     After  about  ten  days  of  waiti..^  with  no  re- 
port, he  went  to  the  bank  to  n.ake  inquiry.     Nothing 
had  been  heard  of  the  check.     He  could  wait  no 
longer    and   wi,-e.l   for   fun.ls.     Several   davs   later 
when  he  had  almost  forgotten  the  e.itire  ..latter    he 
was  asked  to  con.e  down  to  the  bank  and  talk  over 
hs   dral  .     By  tracmg   indorsements   o..    the   back 
f  It,  he  found  that  .t  had  been  sent  to  Albany,  fro.,, 
here  to  Xew  York,  thence  to  Xashville.  ibcn  to 
K.ioxv.lle.  and  f,.,ally  to  the  drawee  bank  in  Xew- 


port.     The  Newport  bank  discovered  that  the 

.8 


drafl 


FKDKHAI.  HF.SKHVK  HANK  CI.K.Ani.VCJS  '     ]<) 

l.ml  }nw  fillcl  „„t  incorrectly  in  tlio  first  pin.r  an.l 
that  It  c-„„l,l  ,.„t  |,e  ,,.,i,J.  \v,„,l  „,,s  set  Imi-k 
ar„un.l  the  circuit,  all  the  ImokkeepinK  i-ntries  were 
corrected.  u„,|  the  <ln.ft  was  finally  rctnrne.l  t..  the 
Ithaca  hank.  Approximately  five  weeks  elapsed  in 
the  n.eantin.e.  \„t  „ver  IV.rty-eiKht  hours  is  required 
for  a  letter  to  reach  \ewp„rt  Croni  Ithaea.  This 
IS  not  an  extreme  ease. 

Heeai.se  of  the  time,  trouhle  and  expense  involved 
in  colleetmK  out  of  town  checks,  the  use  of  checks  on 
banks  in  one  city  for  payments  to  creditors  located  in 
another  city  at  a  distance  is  l<.oke<l  upon  with  disfavor 
Ihe  creditor  who  receives  the  check  n.ust  either  hear 
the  cost  of  collection  or  load  it  (,n  his  bank,  if  he  is 
able  to  do  that. 

Much  of  this  difficulty  could  be  eliminated  if  the 
L  nited  States  had  a  branch  bankins  svstcm  instead  „f 
the  present  system,  which  is  composci  of  some  27  000 
small,  mdependent  banks.  If  there  were  a  hundred 
banks  with  fifteen  thousand  branches,  the  matter 
would  be  ^rreatly  simplifie.l.  Manv  checks  would  be 
redepos.ted  in  another  branch  of  the  drawee  bank  an.l 
no  colleeticm  problem  would  be  involved.  Checks  <in 
different  banks  could  be  put  tliru  centrallv  located 
clearing  houses,  as  they  are  in  Canada. 

2.  Fahrol  Ncsenr  s,>/siem. -The  United  States 
does  not  have  a  system  of  branch  banks.  Their  Fed- 
eral Reserve  system,  however,  is  to  a  limited  extent 
comparable  to  a  branch  system.  There  are  twelve  re- 
gional banks  operating  under  the  general  supervision 


20        DOMESTIC  AND  FOREIGN  EXCHANGE 

and  control  of  the  Federal  Reserve  Board  at  Wash- 
in^on.  Each  of  the  reserve  banks  may  be  expected 
to  establish  branches  in  time. 

Early  in  1915,  the  Reserve  Board  announced  a  new 
plan  for  collecting  checks  within  the  various  Federal 
Reserve  districts.  In  a  ruling,  dated  May  1,  l9io, 
the  original  scheme  was  made  much  more  compre- 
hensive, and  the  extended  system  was  put  into  actual 
operation  on  July  1.5,  of  that  year. 

3.  Federal  Reserve  clearing.— Tht  Federal  Re- 
serve Act  of  1913  empowers  the  Reserve  Board  to  re- 
quire each  Federal  Reserve  bank  to  "exercise  the 
function  of  a  clearing  house  for  its  member  banks." 
Under  this  authority  the  Board  requires  each  of  the 
twelve  reserve  banks  to  receive  at  par  from  its  mem- 
ber banks,  checks  drawn  on  all  member  banks  whether 
in  its  own  district  or  other  districts,  and  also  checks 
drawn  on  such  non-member  banks  as  agree  to  remit 
for  their  checks  at  i)ar.  Each  reserve  bank  must  also 
receive  from  other  reserve  banks,  checks  on  all  of  its 
own  member  banks  and  u\mx\  non-member  banks  in 
its  district  whose  checks  it  can  collect  at  par. 

Banks  have  been  accustomed  to  make  a  charge  for 
renu'tting  cash  in  payment  of  checks  drawn  against 
them  and  presented  thru  the  mails.  The  excuse  for 
the  charge  is  the  cost  and  trouble  of  shipping  cur- 
rency. Country  I)anks,  particularly,  make  a  consid 
erable  revenue  out  of  exchange  charges.  This  is  to 
some  of  them  what  the  farmer  calls  his  "cash  crop." 
It  furnishes  ready  money  in  the  business. 


FEDERAL  RESERVE  BANK  CLEARINGS 


21 


Member  banks  are  not  required  to  send  in  checks 
for  clearing;  they  are  permitted  and  encouraged  to 
do  so.  They  are  requini,  iiowevr,  to  remit  at  par 
for  any  checks  against  ilu ni  whit!,  the  reserve  l)ank 
may  present  thru  the  mj  L-  or  otherwise.  They  bear 
none  of  the  expense  unless  they  send  in  checks  to  be 
cleared ;  when  they  do  send  in  checks  they  are  charged 
pro  rata  by  the  reserve  bank  according  to  the  number 
of  items  (not  the  amounts)  presented  by  them  for 
clearing.  The  cost  for  the  first  three  months  ran 
from  one  to  two  cents  per  item. 

Non-member  banks  are  not  permitted  to  clear. 
Checks  against  them  are  received  at  par  and  cleared 
only  so  long  as  they  remit  at  par.  They  are  almost 
compelled  to  remit  at  par  when  member  bapks  are 
doing  this,  because  of  the  loss  of  prestige  suffered  if 
their  cheeks  are  not  worth  as  much  in  other  cities  as 
are  the  checks  of  competitive  member  banks.  Par 
lists  of  member  banks  and  non-member  banks,  or 
wiiich  items  are  received,  are  published  from  time  to 
time. 

4.  When  proceeds  arc  available. — Checks  are  cred- 
ited at  par  immediately  upon  receipt,  subject  to  final 
payment.  The  funds  are  not  available  for  with- 
drawal or  to  be  counted  as  a  part  of  the  minimum 
reserves  with  the  reserve  bank,  however,  until  actu- 
ally paid  or  until  sufficient  time  for  payment  has 
elapsed.  A  schedule  is  published  by  each  reserve 
bank  showing  the  number  of  days  required  for  collect- 
ing on  various  points  in  the  country.     For  example, 


aa        DOMESTIC  AND  FOREIGN  EXCHANGE 

tlie  Federal  Reserve  Bank  of  Chicago  issues  a  schedule 
containing  four  divisions: 

1.  Points  on  which  check  ■  are  available  at  once. 

a.  Points  on  which  checks  are  available  in  two  days 

a.  I'oints  on  which  chocks  are  available  in  four  days 

4.  Points  on  whicii  cliecks  are  available  in  eight  da^s. 

A  member  is  forbidde..  to  allow  its  reserve  on  de- 
])osit  with  the  reserve  bank  to  fall  below  the  legal 
limit,  under  penalty  of  a  fine  equal  to  two  per  cent 
al)ove  tlie  ninety-day  discount  rate  at  the  reserve  bank. 

It  is  proposed  that  all  checks  and  drafts  received 
shall  be  forwarded  for  collection  as  rapidly  as  pos- 
sible. The  saving  from  this  direct  routing  should  be 
considerable. 

.5.  Member  banks  maintain  balances.— There  are 
four  ways  by  which  a  member  bank,  say  in  Chicago, 
can  build  up  its  balance  at  the  reserve  bank. 

1.  Deposit  Chicago  exchange. 

2.  Deposit  out-of-town  items. 

a.  Ship  currency  to  tiie  reserve  bank,  at  the  expense  of 

the  reserve  bank. 
■*.  Rediscount,  leaving  proceeds  on  deposit  for  exclmn<re 

purposes. 

A  non-member  bank  cannot  remit  for  checks  drawn 
on  it  except  by  sending  cash.  The  cost  of  shipping 
cash  is  borne  by  the  reserve  bank. 

The  clearing  plan  places  non-member  banks  at  a 
decided  disadvantage  as  compared  to  member  banks. 
They  are  practically  compelled  to  remit  at  par  when 
called  upon  to  do  so,  because  of  competition  from 


t'KDEKAL  KESEKVE  BANK  CLEARINGS        23 


meaiber  banks.  This  deprives  them  of  the  income 
which  they  formerly  received  thru  the  practice  of 
making  a  deduction  when  remitting.  At  the  same 
time  they  do  not  have  access  to  the  inexpensive  re- 
serve clearing  machinery.  They  cannot  send  in  items 
to  be  cleared.  Moreover,  they  cannot  maintain  bal- 
ances with  the  reserve  banks  for  exchange  purposes, 
as  can  member  banks.  They  are  not  permitted  to 
keep  any  deposit  with  reserve  banks  or  to  rediscount, 
but  must  remit  cash  for  each  batch  of  checks  presented 
for  payment. 

6.  Indorsement  and  presentation  of  items. — Mem- 
bers' banks  are  instructed  to  indorse  without  restric- 
tion all  items  forwarded  to  the  reserve  banks  for  clear- 
ing. This  makes  the  member  banks  liable  on  all  items 
cleared.  The  reserve  banks  merely  act  as  agents  of 
the  banks  and  do  not  assume  any  liability  other  than 
ordinary  care  and  promptness  in  presenting  items  for 
collection. 

Checks  on  member  banks  within  the  district  are 
forwarded  directly  to  them.  Checks  on  non-meml)er 
banks  are  forwarded  thru  collection  agents,  pre- 
sumably member  banks.  Checks  on  banks  in  another 
district  may  be  sent  to  the  reserve  bank  of  tiiat 
district. 

Under  the  old  clearing  system,  doubt  was  raised 
from  time  to  time  as  to  the  legality  of  presenting  thru 
the  mail  a  check  to  the  bank  on  which  it  is  drawn.  In 
a  few  states  the  courts  have  held  that  this  procedure 
was  improper,  and  that  banks  so  doing  were  guilty  of 


«4        DOMESTIC  AND  FOREIGN  EXCHANGE 

negligence.  It  is  pointed  out  that  the  holder  of  a 
note  would  not  think  of  mailing  it  to  the  drawer  W 
collection,  inasmuch  as  the  drawer  might  tear  un  Z 

net  ^  From  ^  T^'  •«"  -''^^^  ^l^Z^l 
ness.  i.  rom  analogy  ,t  is  reasoned  that  a  check  should 
be  presented,  not  directly  thru  the  mail  to  the  draw^ 

town'  '?  '"'^'r '-^  '^^-  --ther  hank  in  the  I 
town      The  analogj^  ,s  a  poor  one.     The  destruction 

abilitj     the  deposit  still  remains.     AVhat  difference 
does  ,t  make  whether  the  amount  is  paid  to  the  depo"! 

Thrcoll    r  ?'  r'"'' ""'  *°  "'^  P">'--  -ho  hold's    1 
The  collecting  bank  should  be  held  only  to  a  prompt 

and  actual  presentation  of  the  check.     This  pre  e'ta 
•on  can  be  made  by  sending  the  check  thru  the  mall 
as  well  as  m  any  other  way. 

3  ^,f'l"'^''f'''°i!^'tion:~It  was  stated  in  Section 
3  that  the  service  charge  made  by  reserve  banks  to 
member  banks  during  the  first  three  months  oJ 
operation  ran  from  one  to  two  cents  per  item  I„ 
addition  the  bookkeeping  of  member  banks  has"been 
material  y  s.mphfied.  It  is  to  be  expected  that  mem" 
ber  banks  would  lower  their  exchange  charges  To 
customers.     In  fact,  the  Federal  Resfrve  Bofrd  is 

to  be  made  by  reserve  banks,  but  also  tlie  exchange 
charge  made  by  member  banks.  There  is  a  provision 
that  the  member  banks  must  not  be  forced  to  carry 
on  the  collecting  business  at  a  loss.  Presumablv  the 
charges  will  be  fixed  ultimately  at  a  figure  just  about 


IL_ 


FEDERAL  RESI.KVE  BANK  CLEARINGS 


85 


equal  to  the  cost  involved,  with  perhaps  a  small  mar- 
gin of  profit. 

Many  banks  have  voluntarily  lowered  the  charges. 
In  the  larger  cities,  it  is  customary  for  the  clearing 
house  banks  to  agree  upon  uniform  rates.  Some  of 
the  clearing  houses  have  already  reduced  the  rates  to 
be  charged  by  their  members  without  waiting  for  ac- 
tion by  the  Reserve  Board. 

8.  Itates  of  Xetc  York  Clearing  House  banks.— 
The  new  ruling  of  the  New  York  Clearing  House  As- 
sociation may  be  cited  as  an  example.  This  went  into 
effect  on  January  1,  1917.  Under  the  old  ruling, 
items  on  certain  points  were  made  discretionary,  that 
is,  the  banks  were  permitted  to  charge  any  or  no  rate 
as  they  chose.  In  practice,  they  made  no  charge. 
Items  on  certain  other  points  were  cliarged  for  at  the 
rate  of  not  less  than  one-tenth  of  one  per  cent;  and  on 
others,  farther  away,  not  less  than  one-fourth  of  one 
per  cent.  If  any  charge  was  made,  it  could  not  be 
less  than  ten  cents.     The  ten-cent  rule  is  abolished. 

The  new  ruling  contains  about  the  same  list  of  dis- 
cretionary points,  except  that  Boston,  Providence, 
Albany,  Troy,  Bayonne,  Newark,  Philadelphia  and 
Baltimore  are  omitted.  These  cities  are  covered  in  a 
new  ruling  which  is  quoted  below.  The  old  list  of 
points,  items  on  which  aj  e  charged  at  rates  of  not  less 
than  one-tenth  and  one-fourth  of  one  per  cent  re- 
spectively, is  kept  the  same.  Many  items  on  these 
points,  perhaps  a  majority  of  them,  soon  will  be  cov- 
ered  in  the  following  new  ruling: 


«6        i>OA,KSTIC  AND  FOREIGN  EXCHAXGK 

tiK-  collocting  bank.       '""*'"'"— '^'""•^^'■"■'arv  with 

(b)   *""'•  "11  items  available  two  da vs  aff,..  .      •   . 
—pursuant  to  said  i.nHfi„„t-  "".^f  after  receipt 

fortieth  of  one  ;;.;nt>f"?7""!  '?''  ''"""  '">'- 
of  the  itoMKs.  (Fxc  "  t  a.f  •  '"  ^  "^  "'^'  '"""""' 
Sees.  4  and  5.)^  '''  ""  *"  "^'"^  ■'^■f'^rred  to  in 

"ni-.»eiti.^:;::;;'^:!,"::^<•";'--^°^losstha„ 

amount  of  the  items  ^     "  ^  '"  •>  "^  ^'e 

on.'^tent';  ^f  o"ne'Vc     c^nt "  T/'" V?^/ 1^^  *'- 
amount  of  the  itenfs.  ^     "  ^^^>    °^  ^^e 

Eight  (Jays  is  sufficient  time  to  -iJInw  f 
on  any  part  of  the  countrv      Tf  "^  ™"eetiou 

banks  anLn%ll:':^^l'''''''^^  -  ''«"  -.nber 
wherever  located  the  oir  I  ^'  non-n,en,ber  hanks. 
-,her  hanks  ^hich  do  nTrLT'  r;:''^' ^'  ""- 

9-  An  ill'mf ration. —nevertinfT  t«  +v, 
transaction  descrihed  in  tbl         ^  .         ""  ^'^P^  f™'* 


FEDKRAL  HKSKKVK  HANK  CLKAUINGS        or 

to  Swann  in  Tampa.  If  the  Denver  bank  is  a  mem- 
ber o  the  Federal  Reserve  syste.n  or  if  it  i,  ,  "  . 
n.e„.her  hank  whieh  has  a^ree.l  t.,  ren.it  at  par  t.   tl 

»•  the  Pederal  Keserve  Bank  of  Atlanta  at  par. 
S«ann  may  deposit  it  with  his  Tampa  hank,  which  will 

wi's  es""  ri  "  '''T'  *"  *''^'  '•*^-^-'-  '-^  '•'•  it 
Th     ?■  !  ^^'"''^'Vl>">-^'e  to  the  hank  will  he  pn.h- 

ahh  on,.  an<l  one-half  eents;  the  exehan«e  eharL  to 
Swann  n,ore  than  that  hy  an  an.ount  sufficient  t.Tpav 
b ookkeepmg  expenses,  etc.  The  cost  of  crrenev 
s lupment  does  not  enter  into  the  extra  exehan,.e  ahove 
e  service  charge,  .nasnn.ch  as  this  is  horne  hv  the  re- 

cLr^e         ""'  ''  '^'■"'""''''•^'  '"^''"''-^  '■"  t'-e  service 

ed  ted  to  the  account  of  the  Tan.pa  hank,  hut  is  not 
available  for  w.th.lrawal  or  as  reserve  until  sufficie 
t nne  has  elapsed  for  collecting  it  in  Denver.  tTc 
check  ,s  mnnediately  sent  to  the  Federal  Keserve  Bank 
of  Kansas  C.ty.  There  it  is  credited  to  the  Atla  .ta 
reserve  hank,  .lehite.l  to  the  Denver  hank,  and  f^^! 
warded  for  collection-either  to  the  Denvc  ba  k  - 
rectly  or  to  .t  mdireetly  thru  some  other  hank  in  the 
v.cnnty,  which  has  been  designated  hy  the  Kant   C  ^ 

our  dajs,  certainly  not  over  eight  davs,  the  whol'e 
transaction  is  settled.     As  con.pared  to  the  old  coN 


S8 


DOMESTIC  AND  FOREIGN  EXCHANGE 


tag';  of  t  rX,nf,f -''7"'«^--The  advan. 
the  dr?;i  Zr'^"'"'  P"-°"'P"^  "-"^  d'-tl,  to 

petition  of  member  banks  '^^  "^  ''^  *=■""- 

*•  t  ountrv  banks  will  n«  i  "'"-li. 

tain  such  large  balance  in  thT""  ""''f  *°  """"- 
exchange  for  the  priWIo  '     ft       ""'"*'  •''^"*"«  '" 

out-of-fo.„  items'^  c^^VltJaV^^'^l!''"^''"-' 
<'ty  banks,  instead  of  makinl  ?.K  ^  'f''^'"'^- 
item  collected,  have  L^n  ^  .  ''"'■«''  f"''  ''»'•'■ 
oountr,  banks'  t^Ii^tl  ScT^.tMh^^"''^^ 
eompensafon  for  collection  service  ""  "' 

^^  There  are  two  ^portant  objections  to  the  new 
^  anjount  when  re^itt^r  chic ^r^! 
service  wilj  be  rendered  to  nn  ;L  collection 


FEDERAL  RESEKVE  BANK  CLEARINGS        29 

5;:::r  ^"""'"*''  •"-^^•^^  ^--  ^^^  —try  bank.-. 

restlL'tTT.  ""  "'"J""  °'  P^««*  t"  '-th  cor- 
respondents, there  are  other  reasons  for  rem-et  in  the 

b  twe'n'Zkr-  '''  ""'^"'"^  ''^  *"-  -'att^h! 
oetween  banks  ,„  various  parts  of  the  country.     Cor- 
respondents kept  each  other  informed  about Ls.teL 

Sirs  T  *  "•■  '^'P'''''-'  communities.  In ", " 
Un,ted  States  the  criticism  has  been  very  frequentl^ 
heard  that  most  of  our  bankers  are  Lely  S 
money  lenders  and  that  they  do  not  have  adeamte 

country.  The  breakn^t.  up  of  collection  arrauL^e 
ments  wdl  make  them  all  the  more  provincial.  Si 
consideration  is  not  sufficient,  however,  to  outweigh 
«>e  advantages  of  cheapness  and  conv;nience  S 
will  be  gamed  from  the  new  plan.  Some  other  wav 
must  be  found  for  informing  our  bankers  about  na^ 
tion-wide  business  conditions.  The  best  means  of 
doing  this  would  be  the  establishment  of  a  branch 
banking  system.  urancn 

n.  Success  of  the  stjstem.-Tbe  new  clearing  svs- 
em  grew  rapidly  from  the  very  beginning.     The  fo  - 
lowmg  figures  give  a  comparison  between  the  business 
done  the  tirst  month  with  that  done  during  the  f"  urth 


»        DOMESTIC  AND  WKEIUN  KXCllANGE 

a* 

•3  l-A 

*  -s  5  Is 

tl  fs  II        If  I 

Bank  ^"  .^-  Jo  §^l 

•N'<-»   York "•♦.SIO  .¥:ti.i:i(i,si«)  <o„ 

Atlanta...::;;:; .'^.?-S  "'"'•"•'^'*  .'?5  ^"J 

lil"-"- :::::«jS      .^r       *-^       ^ 

Mi„„e„po,is.::::::::;*t^JJ      !?-;~       ^2'      t:«« 
Dallas  ....^.::: ';^'!;-»       9.!h<m;m      ,.,k,,^      .hj„' 

SHnFrancl.c„....::;:5?:«i;^  ;.~;  7i,  ":^ 

Total  Apr.  l(i  to        -  '  ""•lif!  ""'^  Oil 

May  IS,  l..)19 795  ,„g  ^.  ■ 

■luly   IS  lo   .\u(r.  *«»,N"4,«7.5  8,788  ii,2«i 

'■'•'"" '^'"^  «^W,«n«  7,«24  7  01., 

ment   fund   hos    heen  e>tab]i,M   at   Wasl„W„° 

s^rve  bank  telegraphs  to  Washington  the  amo^s  o" 
Js  .ndebtedness  to  each  of  the  other  reserve  banks 
By  the  sunplest  bookkeeping  operation  the«e  Lolts 


FKDKUAL  KKSKUM,  HANK  CI-KAUINGS        .'Jl 

iire  offset  and  tlie  proper  i)alaii(.Ts  traiisl'urreil  on  the 
ai-uoiiiits  of  tlie  (iold  l""iiii(l. 

At  the  .stttkiiiunt  of  Noveiiiher  Ki.  1!M0.  over  ^'^OO,- 
000,000  was  cleared  for  tlie  reserve  hanks  with 
halances  aff^refi:atiiijr  oidy  )i<n,7.>.'>,0()().  Kven  the 
hahmecs  were  not  sliij)ped;  they  were  merely  trans- 
ferred on  the  l)ooks  of  the  l-'iind.  After  settienicnt  on 
that  day,  there  was  nearly  $14.0,000.000  in  tiie  Fund. 
It  is  apparent  tiiat  the  o])eration  of  this  ])lan  reswlts 
in  an  enormous  savin<r  thru  reducing-  the  amounts  of 
^old  shipped  from  one  part  of  the  country  to  another. 


UKVIKW 

How  could  the  coiiiilrv  clicck  rvil  lie  cliiiiiii'itcd  ? 

DiM'ribc  the   I'liliral   Hiscrvc  plan   for  colliitiiifr  clircks. 

How  can  a  mcnilur  li.iiik  l)iiil(l  up  its  lialaiicc  al  a  rcsirvr  l>aiik. 
and  wliy  arc  non-mcnilur  lianks  placid  at  a  disadvaiitaac  in  dniiij; 
so  ? 

Wlial  adTantaftcs  arc  f;aiiicd  thru  incndicr  hanks  in(hirsinK 
without  restriction  all  items  wliicli  are  forwanhd  to  reserve  hanks 
for  clearing?  What  was  tlic  practice  under  the  old  clcarinjf  .sys- 
tem ? 

What  are  the  advantajres  and  disadvantajrcs  of  tlie  Federal  Re- 
serve clearing  system  ? 

What  is  the  Gold  Settlement  I'und  and  how  is  it  operated? 


CIIAPTKII  III 

OKXKHAL  ASl-KCTS  OK  roRKK.N-  EXCHANGE 

1.  Definition  of  foreign  ea-vhangr—Vomtm  ex- 
change  „,ay  be  <leH..ed  a.s  the  sy.ste.n  l.v  whic  Vwo  ' 
-.re  e.n.nt,  es  diseharge  their  debts  a„.l  ad^  s       e 

lajn.ent  .s  effected  by  .nter-cance)ati„n  of  indebt- 
eclness  by  n.eans  „f  bills  of  excha,.,a.  and  other"  >    t 

juste,!  fnm.  t,n.e  to  tin.e  by  the  shipn.^nt  of ^d 
or  .t.s  eciunalent.  The  foreign  exehanges.  therefWe 
operate  as  a  clearing  house  between  nations  an.l  ju  t' 

ami  set  ie  the  hnal  difference  in  gold,  so  nations  offset 
the.r  ,1c  .ts  aga  nst  one  another  an.l  in  the  final  a  "iv 

n  t  b,  overlooke,!.  however,  in  stu.lying  international 
-change  hat  there  are  no  .IcHnite  settlcn.ent  .lavs  "  ■ 
the  a,ljustmg  of  all  transactions  to  .late.  The  ad  iust- 
ment  ..f  mtcrnational  balances  is  a  eontinu,.us  process 
and,  nnder  normal  conditions,  har.lly  noticeable  to  the 
keenest  observer,  except  at  certain  seasons  of  the  year 
or  when  .t  serves  as  a  corrective  to  some  large  and  un- 
expected transaction. 

2.  How  indebtedness  befrvccn  two  countries  arises 

32 


GENKRAL  ASPECTS 


an 


— The  muttial  indebtedness  of  two  eountries  arises 
from  a  eonibinution  of  the  foUowiiifr; 

Exports  of  nierehiindise 

Investments  abroad 

The  purchase  of  foreign  securities 

Payments  of  interest  and  dividends  to  foreif,'n 
shareholders 

Charges  for  transportation,  insurance  and  com- 
mission paid  to  foreign  corporations 

Tourists'  exi)en(litures.  etc. 
There  are,  of  course,  many  other  causes  wliich  affect 
the  course  of  tlie  exchanges,  lait  the  above  arc  tlie 
principal  factors  in  the  Huctations.  Sometimes  the 
balance  of  payment,  as  it  is  called,  is  with  one  country, 
sometimes  with  another,  and  the  rate  of  exchange  will 
accordingly  rise  and  fall  within  certain  wclI-dcHned 
limits,  determined  by  the  cost  of  shi|)ping  gold  ht- 
tween  the  two  countries.  The  rate  of  exchange  may 
he  '.  .^,!  the  price  of  the  money  of  one  country 
rec  I'c  '  e  money  of  any  other  country. 

The  i»i  incijjal  operations  of  foreign  exchange  in- 
clude the  issue  of  drafts  and  various  forms  of  com- 
mercial paper,  money  orders,  letters  of  credit  |)ayable 
abroad,  cable  transactions  and  the  purchase  and  ship- 
ment of  bullion  and  of  foreign  coin. 

3.  Similaritij  hctiL-ccn  inland  and  foreign  cwcliangc. 
— We  endeavored  in  Chapter  I  to  establish  in  the 
mind  of  the  reader  that  the  basic  principles  govern- 
ing inland  and  foreign  exchange  are  the  same,  the 
operation  of  both  being  based  on  the  weight  and  fine- 


34        DOMESTIC  AND  FOREIGN  EXCHANGE 

ness  of  the  gold  contained  in  the  monetary  unit  or 
units  of  the  country  or  countries  involved. 

The  same  machinery  is  used  in  botii  foreign  and  in- 
land exchange  but  in  different  degrees.     In  inland 
exchange,  the  transfer  of  funds  is  effected  almost  en- 
tn-ely  by  checks,  bank  drafts  and  shipments  of  cur- 
rency; very  little  gold  is  moved.     Bills  of  exchange, 
tho   extensively   used,   are   comparatively    small   in 
amount  and  scattered  in  destination,  and  are,  there- 
fore, not  an  important  factor  in  inland  exchange.     In 
foreign  exchange  the  transfer  of  funds  between  two 
countries  is  effected  chiefly  thru  the  medium  of  bills 
of  exchange  and  the  shipment  of  gold.     Few  checks 
aside  from  sight  bills  of  exchange  drawn  bv  banks,' 
are  used.     Currency,  being  redeemable  in  gold  only 
m  the  country  where  it  is  used,  is  of  course  not  ac- 
ceptable for  remittance  abroad. 

4.  Expense  of  shipping  gold.— An  important 
factor  to  consider  in  all  exchange  operations  is  the 
expense  of  transferring  gold  from  one  place  to  an- 
other. This  expense  includes  carriage,  risk  and  in- 
terest while  the  amount  is  in  transit.  The  very  gen- 
eral use  of  checks  and  bills  of  exchange  in  transferring 
funds  has  caused  this  factor  of  expense  to  be  more 
or  less  lost  sight  of,  except  when  conditions  call  for 
the  actual  shipment  of  currency  or  gold.  It  is,  how- 
ever, latent  in  every  exchange  transaction,  foreign 
and  domestic. 

In  the  foreign  exchange  operation,  these  transpor- 
tation charges  are  proportionately  larger  than  in  in- 


GENERAL  ASPECTS 


3J 


land  exchange  because  greater  distances  are  involved. 
They  are  more  or  less  concealed  by  the  tact  that  the 
two  sides  of  a  transaction  are  in  terms  of  different 
currencies,  and  are  usually  modified  or  even  offset  by 
the  competition  of  bills  of  exchange,  the  supjily  and 
demand  of  which  govern  the  proportion  of  such 
charges  which  a  remitter  is  called  upon  to  I)ear. 

In  inland  exchange  these  charges  are  rendered  more 
apparent  by  being  expressed  in  the  form  of  a  com- 
mission or  premium.  They  are  also  more  utiiform 
and  stable  and,  being  governed  by  the  conditions  of 
the  banking  system  of  the  country,  they  tend  to  dimin- 
ish as  the  system  improves  and  better  facilities  obtain. 

5.  Training  in  foreign  exchange. — One  of  the  most 
essential  features  of  a  training  in  foreign  excliange 
is  a  thoro  knowledge  of  values  and  methods  of  co.i- 
version  of  the  currency  of  different  countries.  All 
calculations  by  a  beginner  should  be  made  independ- 
ent of  exchange  tables.  In  many  offices,  the  rirst 
calculation  is  made  bv  one  clerk,  and  checked  by 


ilA 


training  thus  obtained  and  the  facility  and  rapidity 
with  which  such  calculations  can  be  made,  form  the 
groundwork  of  a  technical  education  in  foreign  ex- 
change, which  is  daily  becoming  more  valuable  as  in- 
ternational transactions  increase. 

In  this  connection,  there  are  four  things  to  be  care- 
fully studied.  When  these  are  mastered,  foreign  ex- 
change will  be  robbed  of  most  of  its  apparent  in- 
tricacy : 


36   DOMESTIC  AND  FOREIGN  EXCHANGE 


3. 

4. 
6. 


1.  Mint  par 

2.  Gold  or  specie  points 

Rates  of  exchange  and  tlie  reason  of  their  fluctu- 
ations 

Conversion. 

Mint  par  of  exchange.—The  mint  par  between 
any  two  countries  is  the  value  of  the  monetary  unit 
ol  one  country  expressed  in  terms  of  the  monetary 
un,t  of  another  country  using  the  same  metal  as  a 
standard  of  value,  tho  the  degree  of  fineness  of  the 
metal  need  not  be  the  same.     All  coins,  whether  of 
gold  or  silver,  are  made  of  so  much  pure  metal  and  so 
much  alloy;  the  latter  is  used  to  harden  the  coins,  thus 
rclucmg  abrasion  to  a  minimum.     The  term  "fine- 
ness   expresses  the  number  of  parts  of  pure  gold  or 
pure  silver  contained  in  a  thousand  parts  of  the  com- 
bination     The  British  sovereign  is  9167/3  parts  fine,  or 
11  parts  fine  gold  and  one  part  alloy.     The  gold  coins 
ot  lurkey  and  Brazil  are  also  916%  fine.     Those  of 


Country 


Niiinc  of 
Unit 


Austria-Hun-    kronen 

,  gary     

Latin    I'nion ...  franc 
Canada  and 
I'nited  States. dollar 

Denmark     kronnr 

Germany    reich/mark 

Holland    gulden 

Japan    yen 

Mexico    peto 

fiusia     riihlen 

Great  Britain.. pound 


Gross 
Wiifrht 
Grains 


4.9T817 

2S.8 
6.91415 
6.I«8S 
10.37034, 
12.800.'4. 
12.8(iO_';J 
33..'r-,S4 


_  Sterlina; 

Pure  Dollar     liquiva- 

tiold  iijuiva-      lent 

Grains  of  lent      in  pence 


4.70498 
4.48o;i6 

33.J3 

6.22274 

S..53I31 

9.a3348 

11.37422 

11. .57421 

11.94826 

113.00160 


.20262 
.19293 

1. 
.26799 
.23821 
.40195 
.49505 
.49845 
.51456 
4.86fi5« 
or  4.86^ 


.lOd 
9.316 

49.316 
1.3.212 
11.75 

19.8* 
24.576 
24.57 
23.37 


TABLE  OF  eOLO  CONTENTS  AND  EQUIVALENT  VALUE 
QOLO  STANDARD  AND  GOLD  EXCI 


Country: 

Unit: 

Value  of  «1: 

Fineness: 

Value  i 
Dollars 

F(.ypt 

iE 
IT 

Sovereign 
Escudo 
I'eso 
Dollar 
Dollar 
Peso 
Milreis 
Milreia 
Rouble 
Yen 

Florin  or  i 
Guilder  J 
Colon 
Rupee 
Krone 
Mark 
Krone 
Franc 

i^£  0.2023 
ir  0.2273 
4.U31(id 
/;  .'J2jo 
1'  .9669 
$    .9803 
$1. 

P  1.0365 
1$831 
S»0823 
J?  1.9434 
y  2.0062 
//  2.4878 

C  2.1489 
/?  3.1.1 
A-/ 3.7315 
il/4.1979 
A>  4.9352 
/^«  5. 18262 

875 

916% 

916% 

900 

917 

9I6V3 

900 

900 

017 

nio« 
900  • 
900 
900 

900 

916% 

900 

900 

900 

900 

f4.9429 

Tnritpy 

4.3968 

4. 80631 

I'nrtii|r!il 
TTriij^iiny 

1.0805 
1.0342 

1.0139 

^Tnitiwl  Smiss 

1. 

Argpnfina 

.9647 

Rrn7il 

.5461 

Brazil                  (/a/"'») 

.3244 
.5145 

.Iflpnn 

.4984 

Netherlands,  The 

.401" 
.4653 

.3244 

Scandinavian  Union 
*^prmany 

.2679 
.2382 

Anslriii-Hunf'jiry 

.2026 

T.ntin  ITninn 

.1929 

STATEMENT  OF  EQUIVALENT  VALUES  OF  THE  M 


Country 


Great  Britain 


North 
America 


Great  Britain. 

Portugal 

Uruguay. 


North  America- 


Argentina- 
Brazil 


Russia- 
Japan  . 


-£1.  S/g. 

-  Esc  lido 

-  Pi-io 
^Dollar 

-  Peso 

-  .min'is 
_  A'u.vi/d" 
_1V« 


Holland. 

Chili 


India  (Br.)_ 


.  Plot  in 
.  Peso 
_  Rupee- 


Scandinavi.in  Union 

Crown 

Germany Mark 

Austria-Hung'y Crown 

Latin  Union Fr.^nc 


Pounds 
1. 
.222.019 
.212,518 
.205,484 

!l98,243 
.113,228 
.105,735 
.102,420. 

.082,596 

.075 

.006,666 


.055,068 
.048,949 
.041,036 

.o.'in.fiin 


Pence 

240. 

53.284,58 

51.004,38 

49.316,11 

47.578,34 
26.934,77 
25.371,24 
24.582,17 

19.823,01 

18. 

16. 


13.216,22 
11.747,736 
9.992,76 
9.515,09 


Dollars 
4.866,563 
1.080,470 
1.034,233 
1. 

.964,763 
.546,166 
.514,567 
.498,461 

.401,960 
.364,992 
.324,438 


.267,990 
.238,213 
.202,626 
.192,9-53 


Calculations  based  on  15.432,35  grains  to  the  gramme. 


ENT  VALUES  OF  THE  MONETARY  UNITS  OF  THE  PRINCIPAL 
GOLD  EXCHANGE  STANDARD  COUNTRIES. 

Value  in 
Dollars: 

Value  in 
Pence: 

Uran 

mes 

Kemurks; 

Standard: 

ritiu: 

14.9429 
4.3960 
4.86656 
1.0805 
1.0343 
1.0139 
1. 

.96476 
.54010 
.32444 
.51457 
.49846 
.401 -^O 

.46535 
.32444 
.26799 
.23821 
.20263 
.19295 

243.733 

216.8 

240. 
53.284 
51.003 
50. 

49.316 
47.58 
26.935 
16. 

25.371 
24.582 
19.823 

22.951 

16. 

13.216 

11.748 
9.993 
9.516 

8.500 
7.2161 
7.988055 
1.80631 
1.09717 
1.0(i420 
1.671813 
1.6129 
.89618 
.532537 
.86026 
.83333 
.672 

.77801 

..-.32537 

.448023 

.398248 

.3387531 

.3225806 

7.4375 
(!.615 
7.32238 
1.62571 
1.5.5615 
1.. 52.551 
1., 50463 
1.451(U 
.82207 
.48816 
.774234 
.7.50 
.(i048 

.7002 

,48816 

.4032258 

.:i584,'3 

.301378 

.290;!22« 

113  -jjij  ;;raMis 

Ni.  ;.'i.l(l  cniii>  miutfil 

23.22  ^r.iiiH 
45/31  urumiuua 
N(.  t;iilil  cniri.<  miuliil 
l/15,.i    il 

Nu  1,'nlil  coiti^  niiiiteil 
1/15  of  J.I 
25/62  ui:iriimt.-i 
IOO/27'.I  uraiiime.s 
25/S2  ^iraiiinifs 
9/31  i;raiiiini.s 

S  OF  THE  MONETARY  UNITS  OF  VARIOUS  COUNTRIES. 


orth 

ilolland 

Scandinavian 

Germany 

Aiistria- 

Latin 

erica 

Union 

Umigary 

Tnion 

liars 
.6,563 
30,470 
54,233 

Florins 
12.107,110 
2.688,010 
2.572,990 
2.487,816 

Crowns 
18.159,515 
4.031,761 
3.858,223 
3.731,485 

Marks 

20.429,46 

4.535,733 

4.341, 6:U 

4.197,922 

Crowns 
24.017,136 
5.332,321 
5.104,140 
4.935,192 

|.'raiics 
25.221,51 
5.599,670 
5.3I»,039 
5.182,621 

M,762 
46,166 
14,567 
98,461 

2.400,152 
1.358,760 
1.280,148 
1.240,079 

3.600,000 
2.038,010 
1.918,100 
1.860,000 

4.050,000 
2.292,762 
2.160,113 
2.092,500 

4.761,288 
2.695, 133 
2. .-.39,488 
2.460,000 

5.000,000 
2.830,571 
2.666,H()6 
2.583,333 

01,960 
W,992 
24,438 

1. 
.908,033 
.807,141 

1.499,904 
1.361,963 
1.210,634 

1.687,392 

l.,-,;J2,206 

1.361,963 

1. '.183, 7 14 
1.801,306 
1.601,161 

2.0M3,200 
1.891,616 
1.681,436 

67,990 
38,213 
02,626 
92,953 

.666,709 
.592,630 
.504,097 
.480.030 

1. 

.888,889 
.756,097 
.720,000 

1.125,000 

1. 
.8.)0,610 
.810,000 

1.322, .-.81 
1.175,627 
1. 
.952,258 

I.3.S8,889 
1.234,. -.68 
1.050,136 
1- 

GENERAL  ASPECTS  87 

nearly  all  other  countries  are  on  a  basis  of  900  fine,  or 
9  10  fine  gold  and  L  10  alloy. 

Tlie  folder  opposite  page  30  gives  a  list  of  the  prin- 
cipal gold  standard  countries  with  the  names,  weights 
in  grammes  and  values  of  tlieir  various  units. 

7.  Cumpiitiiif/  the  mint  ywr.— The  mint  par  is  ar- 
rived at  by  dividing  the  number  of  grains  or  grammes 
of  fine  gold  in  the  one  coin  into  the  number  contained 
in  the  other.  For  instance,  compare  tlie  sovereign, 
the  unit  of  Great  Britain,  and  the  gold  dollar,  the 
unit  of  the  United  States: 

Gross  weight  of  sovcrcifcn 123.27447  grs. 

Less  y,2  alloy 10.27287  grs. 

Fine  gold  in  sovereign 113.001fi0  grs. 

Gross  weight  of  dollar 2.5.8  grs. 

Less  '/o  allov 2..58  grs. 

Fine  gold  in  dollar 23.22  grs. 

therefore, 

1        dollar  =  yissii  =  £-205484  =  49.316  pence 

iianoiG  _ 
1  sovereign  =  ~5fj'yr    =  !r4.»oD.>o 

Similarly,  a  franc  contains  .290322.)  grammes  of 
fine  gold,  while  the  dollar  contains  1,50403  grammes. 
Hence, 
1        dollar  =  ^j^l  =  ■'5.18962  fcs. 

1         franc  =  3^35^   =  19.29.53  cents 


^45 
r   ' 


38       DOMESTIC  AND  FORKIGX  EXCHANGE 

The  mint  i)ar  between  any  two  countries  can  be  ar- 
rived at  in  the  same  way.  The  mint  par  between  two 
countries  that  use  the  same  metal  as  a  standard  is 
constant.  It  varies  only  when  one  of  them  alters  its 
eomagc  reffuktions  l)y  increasing  or  decreasing  the 
quantity  of  pure  metal  in  i+s  monetarv  unit. 

Between  a  fr„ld  standard  country  and  a  silver 
standajd  country  there  can  exist  no  fixed  par  of  ex- 
elianH-e.  since  the  value  of  silver  in  relation  to  gold 
IS  subject  to  great  fluctuation. 

8.  P(ir  of  cjThanfje.—Thi,  mint  par  is  the  {)ivotal 
point  of  the  rates  of  exchange  between  two  countries 
In  other  words,  it  is  also  the  ratio  at  which  the  stand- 
ard com  of  the  country  will  be  exchanged  for  that  of 
another.     Theoretically,  a  sovereign  is  worth  par  in 
Aew  Vork  ($-t.866.-,6) ,  but  practieallv  this  ratio  holds 
good  only  for  large  amounts.     If  a  traveler  wants  to 
change  ten  so^'ereigns  in  New  York  he  would  prob- 
ably receive  only  $48..50  or  $48.fi0  for  them  instead  of 
$48.(;(;-.,  the  difference  being  retained  bv  the  bank  as 
payment  for  its  services  and  to  cover  the  interest  on 
the  amount  until  it  had  collected  sufficient  sovereigns, 
say,  one  thousand,  to  warrant  the  troul)le  of  taking 
them  to  the  United  States  mint  where  thev  would  he 
exchanged  for  $4,866..56,  less  a  small  melting  charge 
If  the  ten  sovereigns  are  in  London  the  traveler  will 
realize    on     them     by    selling    to    a     New    York 
bank  the  "right,"  in  the  form  of  a  check  or  order,  to 
draw  these  ten  sovereigns  in  London,  and  the  banker 
would  repay  him  according  to  the  current  rate  of  ex- 


GENERAL  ASPECTS 


39 


change.  If  there  is  an  active  demand  for  sterling  ex- 
change he  will  get  a  good  price  for  his  check  on  Lon- 
don, say,  $48.75  (over  par).  If,  on  the  other  hand, 
there  is  little  or  no  demand  for  sterling  exchange  and 
the  supply  of  ciiecks  and  hills  of  exchange  is  plenti- 
ful he  will  get  a  low  price,  say,  .$48.,50  (helow  par). 

9.  Gold  points. — Foreign  exchange,  thru  the 
medium  of  hills  of  exchange  and  otiier  credit  instru- 
ments, enahlcs  countries  to  regulate  their  nmtual  in- 
dehtedness  without  the  transfer  of  coin  or  hullion. 
A  hill  of  exchange  is  a  commodity  like  wheat  and  cot- 
ton, and,  as  such,  it  is  subject  to  the  law  of  supply 
and  demand.  If  the  purc'vise  rate  of  exciiange 
reaches  the  point  at  which  it  is  cheaper  to  remit  gold 
than  to  pay  the  rate  demanded  for  transfer  by  draft, 
gold  exports  usually  result.  The  rates  of  exchange, 
produced  by  buying  gold  in  one  country  and  ship- 
ping it  to  another,  are  called  tlie  gold  or  specie  points. 
The  mint  or  theoretical  par  remains  invariable  among 
gold  standard  countries.  If  the  exporting  and  im- 
porting of  gold  could  be  effected  without  expense  or 
loss  of  interest,  the  mint  par  and  gold  points  between 
any  two  countries  would  be  practically  identical,  but 
hea\y  expenses  for  freight,  insurance,  cooperage,  car- 
tage, abrasion,  interest  while  in  transit  and  other 
charges  are  involved  in  a  gold  shipment.  These  ex- 
penses deducted  from  the  mint  par  give  the  "import 
gold  point"  and  added  to  the  mint  par  give  the  "ex- 
port gold  point";  that  is  to  say,  when  it  costs  more  to 
buy  sterling  exchange  in  New  York  than  it  would  cost 


40        DOMESTIC  AND  FOKKIGN  EXCIIANGK 

to  buy  Kold  to  the  same  anu.unt  an.l  ship  it  to  London 

Under   normal   conditions,   the  cost   ,.f\l ;. 

send  gold  to  England.  '  '*  "  '''""P*^^  *" 

10   j%«//,V«„c'^  of  gold  movcmcnt,.~.Thv  exoort 

oi  god  from  Xew  York  to  London  implies         ^'"* 

2    tV  .^  n     "/"'^  ""favorable  to  New  Vork) 
2.   That  bdls  of  exchan.rp  ^n   t       i       i  '' 

pound  st^M,  ,„,  „,i,„^  „  hlTtl;  *.L" 
to  Vv  «„ld  ,„  .N>„  York  .„d  „p„„  i,  ,„t„*7' 

i.?d:rpL':'^ '"''"" '''^'•''''^■™  ^•""- 

^-   Ihat  bills  of  exchange  on  London  have  been  of- 


GENKRAL  ASPKCl'S  ^j 

a.   J  hat  the  (liscunt  demanded  by  buyers  in  the 
or."  of  a   ower  exohauKe  rate  exeeeds  two  eent"  pe 
POU.H,  .  erhnK  and  therefore  it  has  becon.  J^JZ 
I'uv  Kold  .„  London  un.l  i,„port  it  to  New  Vork 

.  ^^^««^W.i/v»/«/*.-The  extreme  rani/e  of  the 
«..ld  points  betu-een  New  York  an.l  London  and  the 
eontmentaJ  eenters  is  approxi,„ately  as  foll.";^:         " 

New  York  ami  London... .  $  l„u     «  .  «V:L       u,,  '"'    ' 

Nrw_  Vork   «n<l    Borlin. ::::«,:,;«  is^      9«l-,f''".'"''*'- 


London   iiikI    I'Hris 

London  imd  Merlin 

I^ndon  and  Ain.^terdain. . 


U'.lj 


-•'*■' -'1'  f^■^   per   £|. 


K'.IO      l-'.Ot  Horin'  |«.r  jfL 


1^'.  /Far  fl„d  foreign  exchange. -Under  normal 

cond.tK,n.s,  margins  between  the  two  shipping^nt 

are  thus  suffie.ently  large  to  allow  consiSLbir  lat 

o  the  nmneroas  faetors  affeeting  international  fin  tt 

and  t  ade,  and  the  rates  fluctuate  more  or  less  reg.! 

larly  between  the  two  points,     ^y■,rs  and  run.ors  of 

wans,  aru    other  startling  political  events  frequ  ,  tlv 

disturb  the  delicate  working  of  the  exchanges  ad 

cau.se  the  rates  to  go  .,eyon,l  normal  linuts.     For  ^^ 

s  ance,  ,n  the  first  week  of  August,  IDU,  denn  d 

steH,ng  was  quoted  in  New  Vork  at  .$0  and  ^b   ' 

at  $7  per  I      It  soon  declined  from  these  fi-ures 

i^ebruaiy,  191,,,  when  "demaml"  was  quoted  $4  7.) 
and  on  September  l,  191..  at  $4.50,.  grad^lt  'i 

^^^^^^^.^':::^^^'^'^  -"il-  "-in,  .„r  panic  „r 
*l.««,),  or  $3.33  per  t-L  '"  '"'   ''""  *'"'  "'''  I'"  "'  "■•h«ng-, 


f^J 


M 


48        DOMF.STK"  AND  FOUKKIN   rACIIANOK 


cdviTi'iiK  until  it  rcachfd  ^-l.TcC;;  in  Junuury,  1!>10.  nt 
alxxit  which  ixiiiit  it  wus  iiiaiiitaiiifd  (luring  tlie 
year  li)l(i. 

During  a  serious  war,  therefore,  the  courses  of  cx- 
ehanj^e  are  no  longer  restricted  hy  the  "gold  points," 
but  Huetuate  widely,  and  at  times  wildly.  i\inoiig  the 
new  factors  which  then  affect  the  exchanges  are  the 
following:  the  international  money  markets  are  de- 
morali/.ed;  sentimental,  if  not  legal,  restrictions  are 
placed  on  the  export  of  gold  by  every  country;  and  in- 
surance, if  obtainable  at  all  is  at  a  prohibitive  rate, 
because  of  the  risk  attending  transpoi'tation. 

13.  The  clcarhig  fcalurcH  of  furekpi  CA'cUaiufc. — 
Exporters  and  importers  of  foreign  goods  who  have 
foreign  bills  to  sell  and  buy,  respectively,  occasionally 
transact  business  directly  with  each  other,  but  as  a 
general  rule  it  is  nuich  more  convenient  and  eco- 
nomical to  pay  a  small  conmiission  to  a  bank  for  its 
services  and  obtain  a  remittance  for  the  exact  amount 
and  tenor  required. 

A  bank  is  able  to  sell  a  bill  of  exchange  on  I^ondon 
for  any  required  amount  because  it  is  also  a  purchaser 
of  bills  of  exchange  on  London  and  other  foreign  cen- 
ters; in  other  words,  it  acts  as  a  middleman  between 
those  customers  who  have  debts  to  pay  and  those  tf) 
whom  debts  are  owing  in  I^ondon  and  thus  it  is  able 
to  offset  sales  against  purchases.  If  a  bank's  sales 
of  London  exchange  exceed  its  purchases,  it  goes  into 
the  exchange  market  and  buys  I^ondon  fimds  from 
other  banks  and  vice  versa.     In  this  way  the  supply 


GKNKRAI.  ASIMX'TS 


48 


and  (lemaiul  are  constantly  beinj^  ••roiiglit  tojit'ther, 
first  tliiii  tlie  needs  of  customers  of  the  same  liank.  an<l 
seeondly  liy  transactions  between  the  hanks  them- 
selves, principally  thru  the  \ew  York  exehanj^e 
market  which  acts  as  a  foreign  exchan>?e  clearing 
house  for  the  whole  continent,  and  which  can  he  re- 
lied upon,  under  ordinary  circumstances,  to  absorb 
an  ahnost  uidimited  amount  of  foreign  exchange. 

1-t.  Bulling  and  selling  exchange. — It  is  difficult 
for  the  mind  to  grasp  the  process  by  which  the  multi- 
tudinous transactions  in  foreign  exchange,  occurring 
daily  in  thousands  of  banks  in  the  United  States  and 
Canada,  continuously,  and  apparently  automatically, 
adjust  the  rate  of  exchange  on  the  basis  of  supply  and 
demand.  New  York  is  the  recognized  foreign  ex- 
change market  of  the  continent,  and  banks  thruoiit 
the  country  having  exchange  to  sell  or  buy  do  so  tiiru 
their  New  York  correspondents.  The  exchange  re- 
(juirements  of  the  country  are  therefore  concentrated 
in  New  York.  Some  Xew  York  banks  will  have  ex- 
change to  sell,  others  orders  to  buy.  and  the  scarcity  or 
abundance  of  the  bills  of  exchange  on  any  country  is 
promptly  disclosed  by  competition,  and  the  rates  ad- 
just themselves  accordingly.  Foreign  exchange 
brokers,  as  they  arc  called,  act  as  intermediaries  be- 
tween buyers  and  sellers  in  Xew  York.  As  the 
factors  which  regulate  the  supply  and  demand  are 
constantly  changing,  the  brokers  must  keep  in  close 
touch  with  the  market  and  with  their  clients.  They 
call  daily,  sometimes  hourly,  on  the  leading  bank- 


44        DOMESTIC  AND  FOREIGN  EXCHANGE 

ers  and  exchange  houses  to  inquire  if  they  are  buyers 
or  sellers,  and  at  what  price.  A  broker  not  only 
brings  buyers  and  sellers  together,  but  obtains  in  so 
doing  an  approximate  knowledge  of  the  general  sup- 
ply and  demand  for  bills  and  can  advise  his  clients 
accordingly.  The  usual  commission  to  a  broker  is 
about  $5  per  £10,000  on  sterling  exchange  and  %4 
of  one  per  cent  on  continental  exchanges. 

1.5.  New  York  demand  for  sterling  excliange.— 
London's    operations    in    New    York   exchange   are 
factors  that  have  to  be  taken  into  consideration,  tho 
the  transactions  are  comparatively  small  compared 
with  those  originating  on  this  side.     Since  the  ex- 
change rate  is,  as  a  rule,  fixed  by  the  country  which 
draws  and  negotiates  the  most  bills,  London  neces- 
sarily adjusts  its  rate  to  tiiat  fixed  by  Xew  York. 
The  reason  for  this  preponderance  of  American  trans- 
actions is  that  the  American  exporter,  rather  tlian 
await  a  remittance  from  London,  prefers  to  sell  his 
bill  and  obtain  ready  money  by  drawing  on  his  cus- 
tomer; American  banks  buy  these  bills  readily  as  they 
can    discount    them    in    the    London    market.     The 
American  importer,  likewise,  who  has  bought  goods 
abroad  would  rather  remit  for  them  to  the  foreign  ex- 
porter than  allow  the  latter  to  draw  against  him.     In 
the  former  case  he  can  obtain  as  low  a  rate  as  possible 
from  his  own  bank,  while  in  the  latter  he  would  have 
to  pay  a  rate  fixed  by  a  strange  bank  or  broker  who 
would  not  have  the  same  interest  in  the  transaction. 


GENERAL  ASPECTS 


45 


REVIEW 

What  are  some  of  the  causes  of  indebtedness  between  eoun- 
tries?     What  is  the  rate  of  exchange? 

What  is  essential  in  training  persons  in  foreign  exchanire  busi- 
ness ? 

How  is  the  mint  par  arrived  at?  When  is  it  constant,  and 
when  does  it  vary? 

What  are  gold  points  ? 

Wliat  does  it  imply  when  gold  is  exported  from  New  York  to 
London?     When  it  is  imported  to  New  York  from  London? 

What  effect  has  war  on  foreign  exchange? 


m 


ciiaptp:r  IV 

RATES  OF  KXCHANGE 

1.  Bilh  of  cwcluiuyc  and  their  relation  to  gold  ~ 
llie  stmiKtIi  and  usefulness  of  credit  rest  entirely  on 
the  taet  that  tlie  holder  of  a  bill  of  exclianf,.e  or  o"tl.er 
evidence  of  indel)tedness  has  every  conHdenee  that  tlie 
instrument  will  be  absolutely  and  unquestionably  re- 
deemed m  «(,ld  or  its  equivalent  at  maturity 

The  payment  of  a  del)t,  tlierefore,  in  another  part  of 
the  same  country,  or  to  a  foreign  country  bv  means  of 
a  check  or  bill  of  exchange,  theoretically  involves  the 
payment  of  so  ma.iy  grammes  or  grains  of  ffold.     I  f 

JinoT'?  '\'"™"*"  ""■•^^  S""th  in  Winnipeg  he  pays 
-15100.2;,  to  h,s  bank  in  Toronto  in  order  that  Smith 
may  receive  .$100  in  jrold  or  its  equivalent  in  Winni- 
peg. As  a  matter  r,f  interest,  we  will  work  out  the 
transaction  in  terms  of  gold  (the  dollar  contains  '>3  •>2 
grams  of  fine  gold).  For  the  bank  draft  of  .$100 
Brown  pays  his  b..nk  2,.327.805  grains  of  fine  gold 
(^,*J-2  grains  +  ___  ^rrains  commission)  in  order 
that  Smith  may  receive  2.322  grains  of  fine  gold  in 

,, '" n?"^''  •  ^r'  '*'  "■"  *^'^'"^^  ■^••'^'■^^^  ff'-^'"^  «"'!  ^.- 
327  80.,  grams  by  23.22  (the  amount  of  fine  gold  in  the 

dollar),    we    get    our    original    $100    and    $100.2.5 

Brown  could  have  sent  the  amount  to  Smith  himself 

m  cash  ,n  the  form  of  either  gold  or  currency  (govern- 

46 


RATES  OF  EXCHANGE 


'm 


ment  and  bank  notes  redeemable  in  gold  on  demand) 
but  he  would  have  had  to  pay  as  niueii  or  more  than 
the  2j  cents  commission  for  express  charges. 

2.  CoDf  oftterling  cu-cliaiKjc.S'mnlixrly  in  sterling 
exchange,  if  a  draft  on  London  costs,  for  instance,  one 
cent  per  pound  over  the  par  of  $4.8«7a,  Brown  would 
pay  $4..87-'3  per  pound  sterling  for  a  draft  on  London, 
or  worked  out  in  grains  of  gold,  add  one  cent's  worth 
of  gold  or  .23-22  grain  to  ll.'J.OOK;  grains  (the  weigiit 
of  fine  gold  in  the  sovereign)  and  we  get  113.2338 
grains,  which  divided  by  23.22  gives  $4.8r«().5«  per 
sovereign  or  one  cent  over  par. 

If  sterling  exchange  is  low,  say,  $4.8.)  per  sovereign 
or  about  l.«.)6  cents  lower  than  ])ar,  a  draft  on  Lon- 
don for  £1,000  would  cost  lirovvn  $4..8.)0;  iti  other 
words,  in  order  that  Urown's  creditor  may  receive 
113,001.60.)  grains  of  fine  gold  in  London  he  has  to 
pay  only  112,617.08  grains  to  his  banker  for  the  draft, 
the  diflferenee  384..52.)  grains  or  .38452  grain  per 
pound  sterling  is  the  equivalent  in  grains  of  1.6,56 
cent  ( .2322  X  1 .6.)6  =  .384.52  grain ) . 

With  sterling  as  low  as  $4.8,5,  Brown  would  not 
think  of  shipping  the  gold  himself,  but,  if  he  were 
asked  $4.88-':!  per  pound,  it  would  pay  him  to  do  it  as 
the  shipping  charges  would  be  less  than  two  cents  per 
pound.  What  form  would  the  shipment  take?  It 
can  only  he  fine  gold  113,001.60.5  grains  in  weight  in 
the  form  of  bullion,  or  sovereigns  (1,000  of  them),  or 
eagles  to  the  value  of  $4,866.,56  weighing  123,274.47 
grains    (113,001.605  grains  of  fine  gold).     Brown 


*8        DOMESTIC  AND  FOREIGN  EXCHA^•GE 

could  not  send  currency,  as  he  could  in  the  case  of 
Winnipeg  as  bank  and  government  notes,  tho  re- 
deemable m  gold  in  Canada,  are  not  so  in  foreign 
countries  It  IS  an  important  difference  between 
foreigr,  and  inland  exchange  that  apart  from  checks 
a^d  bills  of  exchange,  gold  is  the  oidy  medium  of 
settlement  between  two  countries,  whereas  within  a 
country  itself  any  form  of  currency  that  circulate! 
freely  may  be  remitted. 

3.  Rates  of  exchange. ~B\\\s  of  exchange  are  a 
commodity  and  as  such  are  bought  and  sold,  and  like 
other  commodities  are  subject  to  the  law  of  supply 
and  demand  The  reader  should,  for  the  present.'^is^ 
miss  from  h.s  mind  the  thought  that  he  is  dealing  in 
the  „,oney  of  foreign  countries  and  should  regard 
bil  s  ot  exchange  and  other  credit  instruments,  used 
uj  transferring  fun.ls,  as  representing  a  definite  kind 
of  commodity-evidences  of  indebtedness 

The  rate  of  exchange  is  the  price  per  foreign  unit 
a  nine  1  the  right  to  collect  these  debts  is  sdd  and 
d  not  refer,  except  indirectly,  to  the  value  of  the 
go  d  iLonetaiy  umt.  A  sovereign  is  alwavs  worth 
par  ...  >ew  lork  and  the  gold  eagle  ahvaVs  worth 
par  ,,.  London.  When  sterling  is  cuote,!"  at.  sav, 
*f>4.8 ,  ,n  .N  ew  \  ork  it  does  not  mean  that  the  soverei^^n 
has  depreeiaKd  I:^  cents  below  par:  it  means  that  the 
right    to  obf.^  ,  sovereign  in  London  is  worth  onlv 

"ri'l^'  t"     7       /  V'"  ""^"^  *''^  -^"P"'-^'  "'■  these 
rights    IS  ample  and  the  demand  small,  hence  the 


RATES  OF  EXCHANGE  49 

4.  What  makes  the  r«/f.— Tlie  rates  of  exchariKe 
quoted  between  any  two  wuntries.  tlieiefore,  are  the 
prices  for  elieeks  and  hills  of  exchange.  These  are 
the  mediums  by  wliich  del)ts  are  transferred  from  one 
party  to  another. 

The  rate  of  exehanffe  charged  bv  a  bank  or  broker 
for  a  foreign  bill  of  exchange  includes: 

1.  IV.  mint  par  or  price  equivalent  of  the  foreign  coin 
^.  1IU.S  or  „„nus  a  prcnumn  or  di.sco.int  on  the  n.int  pur 
(greater  or  less   conversely    to   the   .,upplv   of   bills   on    the 
market  as  compared  with  the  demand  for  tliem) 

m/nH^'f"'  r  ''^'""n'"  "■;  ^''-'i^-^i""   «l'i^'l'   tlic  hanker  ,1.- 
mands  for  h.s    rouble  an.l  for  the  economy  and  superior  con- 

buZr       "     ■        "'  '■'""'""■^■''  " '"'  '^  -'"'tt-'-  i"  ^'-n  or 
4.   Less  an  allowance  for  interest,  according  to  the  distance 
between  the  two  points,  and  the  tenor  of  the  draft 

0.  1  his  the  cost  of  shipping  gold.  -- 

The  rate  of  exchange  paid  by  a  bank  or  broker  for 
a  foreign  bill  of  exchange  includes: 

1.  The  mint  ])ar. 

f.   Plus  or  minus  a  premium  or  discount  on  the  mint  par 
•i.   Less  a  conmnss.on  covering  the  dealer's  profit  and  in 
allowance  for  his  risk  and  trouble. 

4.  Less  a  discount,  according  to  the  tenor  of  the  draft. 

5.  .Almus  the  cost  of  shipj)ing  gold. 

The  mint  par  never  varies.  It  is  a  constant  factor 
;n  any  exchange  rate.  The  most  frequent  variations 
m  the  rates  are  found  in  the  premium  or  diseomit 
on  the  mint  par,  the  range  of  which  is  governed  by 
the  law  ot  supply  and  demand,  and  reflects  the  rela- 


4 


50        DOMESTIC  AND  FOREIGN   EXCHANGE 

«ve  position  of  two  countries  as  regards  indebtedness 
Ihe   allowance     or   interest   or   discount   gene  al' 
nds  to  vary  w.th  the  foreign  interest  rate,  tho  son  e- 
imes  m  large  transactions  the  domestic  interest  Tie 
becomes  a  factor  also,  in  connection  with  the  fi     „dl 
operations  necessary  to  complete  then,.     The  cost  o 
^"PPing  gold  is  modilied  and  at  times  offset  by  the 
mutations  in  the  other  factors. 

5.  Coinage  ratio.~The  rate  of  exchange,  therefore 
/nust  not  be  confused  with  the  ratio  at  wh  ch  on^ 
country  will  exchange  its  money  for  the  standi  d  coin 
of  another  country.     If  «  man  has  one  thousand  sov 

SX-fi  .^  ^-•^  h^  -'"  receive  par  for  them  ^r 
$4  8fa6.ob    irrespective  of  the  rate  of  exchange. 

6.  Huctuahon  in  the  rate  of  exchange.-The  in- 
ternied,ate  rates  between  the  gold  points  and  the  mbt 
par.  tha  is,  the  rates  at  whici,  business  is  usually  done 
m  addi  ion  to  being  affected  by  the  supply  and  de 
mand  of  bills  between  two  places,  rise  anS^ "sym- 
pathy with  the  influences  at  work  on  the  other  ex- 
changes.    Xew  York,  for  instance,  whilst  a  debtor  to 

th:?„;':r;t.a9'r9^/^;e":  ::':.:'"l^„„''T„t^""«"^^r"'='«"^ «' 

!fr„ins  (480  grains  to  the  ounce  TrovT  '°:"il«"\r:"«''  '^3,547.47 
*t,Sti(i.S6  as  the  value  of   i  mn  ^^'     ^^"'""K   tWs   out,   we   get 

inited  States  Min'':„:dpT  tTS  M ''^  "  '":"'';  "'  '"''  ^"^ 
(W.380)  on  delivery  and  the  bTlanoe  en  H  TV  ■"?'  "'  ""*  '""»""» 
of  four  oents  per  $100  to  .over  melt  ^'  '""-Mess  a  small  charge 

ceeds  would  be  IW,864!61  ^  "P'"'"''  """^  "«  «'^"«'l  P^o^ 

Similarly   the   British  Mint  will   take   gold   eagles  at    £-!IB  ,v 
ounce,  paymg  for  them  a  fortnWhf  „«      j  ,■  "^"e'"  *^    t3:16:5i/j   per 
The  Bank  of  England  win  n«v    nr  ,h  *"  "i"^'  "■"''°"'  "">•  "charge. 

.w.e  Of  ahout%:i  -  s^to^rt;;:'Sc^t  r^r  ji;^ 


RATES  OF  EXCHANGE 


51 


England,  may  be  a  creditor  of  (lerniany,  France  or 
another  country  with  which  Enjrlaiul  has  close  ex- 
chanf,'e  relations.  New  York  drafts  on  tiiese  places 
are  remitted  to  London  and  improve  (i.  e.  lower)  tl»e 
rate  of  sterling  exchange  for  the  time  being.  If, 
however,  the  supply  both  of  London  and  Continental 
bills  falls  short,  the  point  at  which  New  York  will 
have  to  exjjort  gold  is  soon  reached. 

7.  liatCK  tend  to  correspond. — The  rates  of  ex- 
change between  two  or  more  places  either  correspond 
or  tend  to  correspond.  Thus,  when  sterling  exchange 
is  at  a  discount  in  New  York,  say,  at  $4.8,5,  New  York 
funds  in  London  will  be  at  a  premium;  in  other  words, 
you  could  purchase  in  Xew  York  the  right  to  obtain 
a  sovereign  in  London  for  $4.85,  whereas  for  a  sov- 
ereign in  London  you  would  only  be  able  to  obtain  the 
right  to  $4.8.5  in  Xew  York,  a  dollar  costing  49..50d. 
instead  of  49.316d.,  the  par  value. 

Let  us  suppose  that  the  rate  in  Xew  York,  in  re- 
sponse to  a  demand  for  sterling,  suddenly  goes  to  par, 
and  a  Xew  York  banker,  hearing  from  his  London 
correspondent  that  Xew  York  funds  are  still  at  $4.8.5, 
cables  him  to  sell  $100,000  at  that  rate  and  as  a  result 
of  this  transaction  the  Xew  York  banker  receives  a 
credit  in  London  of  £20,618.5.5.  At  the  same  time  he 
sells  his  own  draft  at  par  against  this  amount  in  Lon- 
don. In  actual  practice  he  would  sell  a  draft  of,  say, 
<£20,000,  but  for  the  sake  of  showing  his  profit  let  us 
presume  that  he  sold  a  draft  for  £20,018.5,5.  For 
this  he  receives  $100,343.64  with  which  lie  pays  the 


52        DOMESTIC  AND  FOREKJX  EXCHANGE 

draft  of  $100^000  cJrawn  on  ..in,  i„  London,  and  thus 
".akcs  a  profit  of  $343.«4  less  cable  eharges  and  a 
Mnall  connnission  to  the  London  banker 

By  sueh  processes  the  exchanges  automatically  reg- 
ulate themselves  between  two  or  „u,re  places      It  1 
o^-ons  that  under  the  influence  of  several  such  tran 
act,ons  n.arK,nal  differences  would  rapidly  disappea 
Ihe  var,at.ons  in  the  rates  of  exchange  in  the  case 
e.t^d  are  purposelj-  exaggerated  for  thf  sake  of  iZ 

will      ^        "''  "J"'^'  ^"^'''^  '"'^^'•^-^'^  in  the 
whkl    .  "T   \^'''  ^^J"^"'"^'  transactions, 

Hh,ch  are  con.n.only  known  as  arbitrage  transac: 

8   E.vchar,ge  quotations.~The  newspapers  gener- 
a  ly  g.ve  exchange  quotations  in  two  cdumns.''  The 
first  column   (b)   gives  the  price  offered  by  buye 
-nd  the  other  (s)  gives  the  sellers'  price    onrex-' 
pressmg  the  demand  and  the  other  the  supph      T,^ 

ni::r:r'''  f^  "•"'^^*  luotations-T  mJe; 

naturally  offer  as  low  a  price  as  possible,  while"  the 
sellers  try  to  obtain  the  highest  price-b  .t  t       re 

tl  "7  r"^-'""  ■'  ^^"^^''"•^  —he-  between 
the  t^u,  Ihere  are  two  classes  of  quotations- 
the  posted  rate,  which  is  used  principally  for  sma  I 
amounts,  and  the  actual  or  wl.olesale  rate,  u  ed  be 
^ween  hankers  and  brokers  for  large  transadn  . 
A    a  rule,  however,  the  rate  for  very  large  trans- 

to  Z^r  '  Tr  "'  "''■"■'"^'  negotiations  owing 
to  the  frequent  change  in  conditions  during  the  da^^ 
Furthermore,  the  rates  are  seldom  announced  in  time 


RATES  OF  EXCHANGE  53 

to  be  of  much  use  except  to  show  the  general  trend  of 
exchange. 

The  principal  exchanges  quoted  in  the  Xew  York 
market  are  given  below,  with  the  equivalent  Canadian 
quotations,  after  allowing  Vio  of  one  per  cent  discount 
on  New  York  funds  in  Montreal.  The  alternate 
quotations  for  marks  and  francs  are  also  shown. 


London : 
I'uhlp 
I>fiiiand 
Cumiiii-ri'iat 

fill   daM 
BanktTN 

fiO  dajH 


Berlin: 
Chock 

Anistfrdani: 
Check 

Hongkong: 
Check 


New  York 
*  l.'r  1   Stg. 

4  H526 

4  !I200 

4.(1225 


Canada,   Less 
1/18  0(1% 


4.8545 
4.8495 


Alternate 
Uuotutiou 


Conla  per  4  Marks 
941V„, 

Cents  per  Klorin 
40.04 

Oonta  per  Hex.  « 


48170 
4.8195 

9404 


CIS  iier  Mrk. 
2;i65625 


Ctn.  per  Kl'n 
40.011..  .40+l,,;i- 


P"fi«  Pes.   per  $ 

Coble  5.20  5   N 

Check  5.20  .1   B  —  l  M 
Commercial 

eo  days  6.24  3 '8—1/32      5.24  3,/S— 3,32 


20  5 '8- 

20  5/8- 


Cts    per  Fc 
-1/10       ii)i!i-,n 

3.'32       .I'llKOn 


New  York  funds 
l>«ng  at  ..„;  dis- 
coiint.  the  Cana- 
dian rale  is  ar- 
rived at  by  rfe- 
'/ucMn.7  l'i„  of  in 
from  the  rate. 

.Cables  are  8  days* 
inter.  Kt  more  than 
demiiiid  according 
to  steamer  sail- 
ings. 

flO  days'  rates  are 

(i'l    ila.xs'    interest 

iind  stamp  (0024) 

-  less  than  demand. 

iThe  Cnnadian  rate 
IS  arrived  at  bv 
mlilinii  Via  to  the 
New  York  franc 
rate  or  d^durlinfl 
'  16  front  the  dol- 
lar value. 


The  American  method  of  quoting  cents  per  foreign 
unit  (fixed  exchange)  is  so  simple  tliat  the  above  table 
calls  for  no  explanation,  except  in  connection  with 
the  special  quotations  for  francs  and  marks  which  is 
fully  explained  elsewhere. 

9.  Range  of  the  nine  frequent  quotatiom.—FTVinc 
quotations  range  from  ai)oiit  .VIO  to  .5.,'JO,  advancing 
by  %  of  a  centime.     Mark  quotations  range  from  92 
to  98  cents  per  4  marks,  advancing  l)v  'An  of  a  cent 
Closer  quotations  for  either  the  franc  or  the  mark  are 


m 


«4       DOMESTIC  AND  FOHEIGV  EXCHANGE 

pound  o.  as  it  .  ealled.  .  ;ZslJ;:::,l  -"*  ^- 

hell   't.  "*'  "''''  '^"  '''^''-  ^"""t--'-  are  shown 
below.     The  quotations  advance  by  stens  „f  >/ 

•01  of  a  cent,  thus  18.01   18  02  mnl       .  """  •"" 

111  >      -a  lo.t/i,  lo.u^   la.Ou  and  >in  nn       Tl. 

being,  of  cLr  eTo  c  I'f        T  ''f  ^"'"^'^  ""'*'* 
in  the  quotaZ  .  ''  '"  '"^'^  "'^^'""^'^  "*'  '"^  -nt 

Ixt""""" '■  ■  •  :  ''"«»         "3      =^ '»="•■      4?';: 

South  Amorio,   : I  Silver  1  39toll'  24.9    •• 

.f„»;,l„ : :  .  J  '_'°"«r  /       fl"<-tu.ii„g  Ui  ,„  50  „  i     ^2.   .. 

R"»«ia!    ;;. ; i'"'",,  .49«        in.ns-i.. -' 

—..;;;::;;;--  ^..        |^^^         j^^;; 

10.  F/.rfrf  an^  mot-afcZe  ea-c^an^e  — When  fn.  • 

chano-«  „r,  T      J      •        '^^^naoRe,  tor  instance,  ex- 
change on  London  is  quoted  in  Xew  York  in  ,l.n 
and  cents  per  pound  sterling.     Theltter  is  th^  fi     J 
has  s.     The  vah.P  nf  fK^  ,  r.  '^  *"^  ^^^^^ 

and  Simplified"  .,y  How„rd  K  B  ooks  Chir"''"  u^'!'""'"'  ''■^'"'""-d 
cover  the  uhole  ranp.  „f  ,he  fo"2„  '  ^k""*™-  ""J'"  "'  •'«-«'  ''o"ks 
ticularly  adapted  for  larse  trlnl^^f  *^  Pxohanp-..  The  former  i,  par- 
tional  quotations.  "    *'-ansactio„s  requiring  the  use  of  clo.,e  frac- 


RATES  OF  EXCrtAXGK  35 

When  the  rate  is  quoted  in  f,.rci>n  currency  per 
home  unit  it  is  called  movable  exchange;  for  instance 
exchange  on  Paris  is  quoted  in  New  York  in  francs 
ami  centimes  per  dollar.  The  latter  is  the  fixed  basis 
1  he  fluctuation  is  expressed  in  the  foreign  currency— 
the  higher  the  quotation  the  lower  the  cost  of  "the 
foreign  unit. 

The  rnite.1  States  and  Canada  quote  in  fixed  ex- 
change (dollars  and  cents  per  foreign  unit)  tho  for 
large  transactions  with  France  and  other  menibers  of 
the  Latin  Union  movable  exchange  is  used  A 
homely  illustration  may  make  the  difference  between 
these  two  methods  of  quoting  clearer.  .Sugar  an.l 
other  commodities,  like  fixed  exchange,  are  sold  at  so 
many  cents  per  pound,  or  per  hundred  pounds,  and 
the  higher  the  price  quoted  the  less  sugar  (or  foreign 
money)  you  will  receive  for  a  dollar  and  therefore  the 
dearer  the  exchange. 

Sugar,  like  movable  exchange,  is  also  sold  at  so 
many  pounds  for  the  dollar  'as  is  the  case  with  French 
exchange)  and  the  more  sugar  (or  francs)  (,uoted  for 
a  dollar  the  cheaper  the  exchange. 

Fixed  exchange :  cents  per  foreign  unit.     Rule,  buy 
low,  sell  high,  the  better  the  bill  the  higher  the  rate. 
Movable  exchange:  francs  per  dollar.     Rule   buy 
high,  sell  low,  the  better  the  bill  the  lower  the  rate. 

11.  Conversiom.—Those  countries  which  are  fortu- 
nate enough  to  have  a  monetary  unit  in  common,  have 
no  conversion  to  make  and  do  not  require  any  ex- 
change tables.     Among  these  are  the  United  States 


56        DOMKSTIC  AND  FOREIGN  KXCIIANGK 


and  Canada  with  the  dollar  in  common,  Great  Britain 
and  her  colonies  with  the  pound  sterling?,  and  the 
Latin  Union  with  the  franc.  Fluctuations  in  ex- 
change rates  in  these  eases  are  (luoted  at  either  so 
much  per  cent  discount  or  premium,  or,  as  in  the 
case  of  London  and  Australia,  so  many  units  for  so 
niany  units,  as  £98  for  £100. 

The  arithmetic  of  the  exchange  is  very  simple  and 
re(iun-es  only  a  knowledge  of  multiplicat'ion  and  divi- 
sion as  the  following  rules  show: 

12.  Convention  for  fuxd  i\vcluincjc.—  (ConvcTmm 
with  cent  quotations) . 

(a).  Amount  in  foreign  currency  =  Amount  in 
dollars  -■-  Rate  in  cents. 

(b).  Amount  in  dollars  =  Amount  in  foreign  cur- 
rency X  Rate  in  cents.  Buy  low,  sell  high,  the  lower 
the  rate  the  more  foreign  money  you  receive  for  a 
dollar. 

To  convert  dollars  into  foreign  currency  we  have 
the  following  rule:  divide  the  amount  in  dollars  by 
the  rate  in  cents  per  foreign  unit. 

Exnmplfs:  How  ninny  francs  ran  be  bought  for  $1,000 
at  lU-S  cents  per  franc? 

1,000  -~  19.3       .'-,,1 81  ..3.5  francs.     Answer. 
How  many  marks  can  be  bouglit  for  $1,000  at  24  cents 
per  mark.' 

1,000  --  24  -  4,166.67  marks.     Answer. 
How  many  marks  can  be  bought  for  $1,000  at  96  cents 
per  4  marks.' 

1,000  -^  "%  =  4,166.67  marks.     Answer. 


KATKS  OF  KXCIIAMiK 


W 


How  I..  .lij-  kronen  can  Ik-  bought  for  iflOOO  at  S6.J6  rents 
]ii'r  kroru'.' 

900  -:-  26.48  =  3,401.36  kronin.     Answer. 

'J'l  convert  foreij^n  currency  into  dollars,  wc  may 
.state  tlic  rii'e:  multiply  the  amount  in  foreij^  cur- 
reiu y  l)y  tli ;  rate  in  cents  per  foreign  umt. 

Kxaniple.s:  How  iniicli  will  druft.s  fn-  'li.  foil 'mnj; 
aniounts  cost.' 

5,181.3.')   francs  at   19.30  cent.s.'      i.;sl,3.-)  X  '.!)••«    ^ 

■tl.OOO. 
4,166.67  marks  lit  34  cents.'     4,16(1  oT   ■   :.!+       i«l,()00. 
4,166.67  marks  at  96  cents  for  four  rii.^ik^-     4,'()(;.67 

X  96  X  '/i  =. tl.OOO. 
3,401.26  kronen  at  26.46?     3,401.26  X  2(1  K;       iSOOO. 

13.  Conversion  for  movable  exchange. —  (Conver- 
sion with  franc  quotations ) . 

Amount  in  francs  =  Amount  in  dollars  Y  Rate  in 
francs. 

Amount  in  dollars  =  Amount  in  francs  :-  Rate  in 
francs.  Buy  high,  sell  low,  the  higher  the  rate  tiie 
more  francs  you  receive  for  a  dollar. 

To  convert  dollars  into  francs,  the  rule  is:  multiply 
amount  in  dollars  i)y  the  rate  in  francs. 

How  many  francs  can  Ix?  bought  for  $1,000  wlicn  the  rate 
is  5.181/s  per  dollar.' 

5.18125  X  1,000  ^  5,181.25  francs. 

To  convert  francs  into  dollars,  the  rule  is-  divide 
the  amount  in  francs  by  the  rate  in  francs. 


58        DOMESTIC  AND  FOREIGN  EXCHANGE 

What  is  the  value  of  a  draft  on  Paris  for  5,181.25  francs 
when  the  rate  is  5.18',,s  francs  per  dollar? 


.5.181  M 


$1,000 


Anv  fractional  quotation  is  applied  on  tho  dollar  value 

^    ■',',  u    i^^*'""''■  '■"**'  '""'  ''"'"  •'■1«'^  +  %^.  ll'^'  «n''»cr 
would  be  $1,000.15  or  $1,000  +  \,;a  of  V/c. 

We  have  not  dealt  fully  with  the  fractional  quota- 
tions of  the  franc,  mark  and  florin,  because  as  a  rule, 
these  are  only  encountered  in  large  transactions! 
They  are  explained  in  Chapters  XV,  XVI  and  XVII. 

14.  Simple  arithmetic  involved— U  exchange  is 
considered  in  its  true  nature,  as  a  commoditv,  foreign 
exchange  arithmetic  will  assume  a  form  elementary 
m  its  simplicity,  as  the  following  examples  show: 
Fixed  excliangc. — 

$10o""  '"""'  "'*""''''''  "*  ^^  '■''"*'  '"'■''  '"'"  '"'  Pureliascd  witli 
100-^.20  ^.500  articles. 
How  much  will  ,500  articles  cost  at  20  cents  each' 
500  X  .20  :.    $100. 
Movable  cxchnnfre. — 

If  one  dollar  «lll  buy  five  articles,  how  many  will  $100  buy' 
5  X  100  =-^  .'JOO  articles. 

bur'.'"'  '^  *''"  '"'"''  "^  ^"°  "'"'''''''^  ''''*'"  """^  '^""'"'  '*■'" 
500-^,'>r=jJ;i00. 

In  dealing  with  commodities  any  commission  or  per- 
centage on  the  price  is  reckoned"  on  the  total  dollar 
value.  In  buying  and  selling  exchanges,  the  same 
rule  is  followed;  fractional  quotations  apply  only  to 
the  dollar  value. 


RATES  OF  EXCHANGE 


59 


15.  Exchange  <ai)/f».— Exchange  tables  like  inter- 
est tables,  are  most  convenient  and  useful  tools,  and 
tho  formidable  in  appearance  with  their  serried  col- 
umns of  figures,  they  are  simple  in  operation  and  their 
compilation  is  merely  a  matter  of  nmltiplication. 

All  exchange  tables  give  the  same  information  tho 
some  give  it  in  greater  detail  than  others— the  number 
of  foreign  units  for  so  many  dollars  and  the  number 
of  dollars  for  so  many  foreign  units,  at  various  rates. 
As  an  example,  we  will  compile  a  brief  franc  table  for 
the  rate  .5.16%.  This,  of  course,  represents  the  value 
of  a  dollar  in  francs  and  we  must  now  find  the  value 
of  1  franc  by  division,  ^,^'^.^-  =  .1934704.  We  are 
now  ready  to  compile  our  table  as  follows: 


Francs  Dollars 

1 1934704 

2 3869408 

3 5804111 

4 7r;«8is 

5 9fi73.il9 

6 1.1608223 

^ 1.;)54i?926 

9 1,5477630 

9 i.;4U'3;u 


Dollars  Franrs 

1 5.1687S 

2 10.33750 

3 15.50695 

4 .'0.6730O 

5 .'5.8437i 

6 :il.0135O 

7 :t6.isi« 

8 4l.:«ooo 

9 46.51875 


By  continued  multiplication  of  the  top  lines,  this 
table  can  be  extended  indefinitely,  but  the  above  is 
sufficient  to  find  the  equivalent  of  any  sum  up  to 
1,000,000  francs  or  dollars. 

890  francs  at  ,5.16%  is  found  as  follows:  ' 

»  In  all  cxchan^  conversion,  whether  by  tnlile  or  otherwise,  it  is  an 
excellent  plan  to  verify  results  liy  nientui  calculation  on  a  lianis  of  $i 
to  the  pound,  5  francs  to  the  dollar.  M  cents  to  the  mark  and  so  on. 
This  insures  the  accuracv  of  the  decimal  point  and  forms  a  rougii  check 
Thus  890  -^  5  francs  =<  »178. 


60        DOMESTIC  AND  FOREKJX  EXCHANGE 

800  francs  =  $154.78 
90  francs   -=       1T.41 


$172.19 

Our  next  table  would  be  at  the  rate  of  5.17*72  (or 
.1932367),  or  if  we  desire  a  closer  quotation,  o.l6-',i4 
(.1934401),  and  so  on  for  every  quotation  that  is 
likely  to  be  required. 

REVIEW 

What  is  the  rate  of  exchange  and  what  determines  it? 
Distinguisli  between  tlie  rate  of  exchange  and  the  ratio  of  ex- 
cliange. 

What  affects  the  intermediate  points  between  the  gold  points 
and  the  mint  par? 

Why  do  excliange  rates  tend  to  correspond?     Give  an  illustra- 
tion. 

How  are  exchange  quotations  given  in  newspajjcrs?     \Miat  arc 
tl)i>  two  classes  of  <|ii()tati(ins  and  Imw  are  they  us'-d? 

Jbxplain  the  diflerence  between  fixed  and  movable  exchange. 


w^^^'M^^SFm 


CHAPTER  V 


FOREIGN   REMITTAXCES 

1.  Non-commercial  exchange. — Altho  the  greater 
portion  of  foreign  exchange  originates  in  coniniercial 
transactions,  there  is  a  constantly  increasing  vohinie 
of  exchange  business  created  by  travelers  and  immi- 
gration. A  steady  stream  of  travelers  and  others 
leave  the  United  States  and  Canada  each  year  to  visit 
Great  Britain,  Europe  and  other  parts  of  tlie  world, 
carrying  wi*h  them  the  necessary  funds  for  their  ex- 
penses in  various  forms,  such  as  circular  letters  of 
credit,  traveler .'  checks,  drafts  and  gold. 

The  remittances  of  immigrants  to  their  relatives 
and  friends  in  their  home  lands  amount  to  a  surpris- 
ingly large  figure  in  the  course  of  a  year.  These  re- 
mittances are  generally  made  by  means  of  drafts, 
foreign  money  orders,  or  by  what  are  called  mail  re- 
mittances. 

For  many  years  these  two  classes  of  foreign  biisi 
ness  were  in  the  hands  of  foreign  bankers  who  mad*, 
a  speei.'ilty  of  the  business  of  suj)plying  banks,  both 
in  the  United  .States  and  Canada,  with  the  necessary 
forms  and  foreign  machinery  for  issuing  circular  let 
tens  of  credit  and  .selling  travelers'  checks.  Ciradu^ 
ally  the  larger  banks  both  in  the  United  States  and 

«i 


62 


DOMESTIC  AND  FOREIGN  EXCHANGE 


-6 


Canada  felt  the  increasing  pressure  of  their  clients' 
requ.ren.ents  ,n  this  connection,  and  found  it  adv  ^ 

Z^:  TT  r'^'r^"" ''•'''''- ^' '^^^^^^^ 

Checks    etc.     Practically  every  important  hank  h.s 
now  d:rect  correspondents  in  the  principal  c.ties 
the  world  w.tl.  whom  they  have  n.ade  the  necesL  v 
arrangements   for   the   pay.nent  of  circ.lar    ee" 
travelers  checks  and  the  like.  ' 

A  comparison  of  the  different  methods  of  remit- 
tance and  a  descr,ption  of  the  n.a,.ner  in  which  tTy 
are  operated  .s  interesting.  ^ 

2    Pnndplcsundcrhiing  the  ksuaucc  of  drafts- 
A  demand  .Iraft  or  check  is  a,,  unconditional  order 
-s^ed   ,y  one  hank  on  another  bank  or  hank.wZ 
-k.ng  the  bank  to  whon.  it  is  addressed  to  pavfc  r- 

!rF;;:::Tr  ^''''^^^''^'^™ -'-***-"•"• 

In  the  case  of  a  bank  keeping  an  account  i,.  an- 

renc\    ,s  stea.ly  an<l   for  which   rate  quotations  arc 
eas.iy  obta.,.able,  d.-afts  a,-e  usuallv  .Irawn  in  th  \. . 
rency  of  that  count.,-  and.  after  pa V.nent.  a.-e        rg    , 
to  the  account  which  the  issuing  bank  keeps  with  ." 
cor.-es,,ondent  at  the  face  an.o,.nt.     If  the  arrale 
ment  calls  for  payment  of  the  d.-afts  at  p       t      c    1^" 
spondents  commission  (if  any)  is  added  t .  th    face 
amount  of  the  draft  when  charged  to  the  account 
Drafts  are  often  n.ade  payable  at  the  office  of  a  thir 
bank  or  bank.ng  firm  for  account  of  the  issuing  bank- 
correspondent.  * 


rOKEIGN  REMI'lTANCES 


63 


Drafts  are  also  issued  on  correspondents  with  whom 
no  account  is  kept.  In  such  cases,  cover-drafts  iu 
favor  of  the  correspondent  tor  the  amounts  in\olve,J 


% 


'■'"'"' •^.    /, 


^■''''i -.«;*:.. .-.i, 


■  O  '////^ 


.  .  -r    '.  ■- 


ofjf^UiriOiHileihilMiiiK  ofV(tnir?[or!;     j 


FrofBE  I.     DnAi-r 


I)ius  commission,  drawn  aj-ainst  tiic  issuiii<r  hanic's  ac- 
count in  one  of  the  iarpe  selh'nff  cities  ( London,  Paris. 
Ikriin,  Xinv  York,  etc.)  are  forwarded  with  the 
relative  letters  of  advice,  or  the  correspondent  is  re- 
•pusted    ttj   forward   the   paid   draft   to  the    issuinc 

\'Vir — r.  o 


6-4       DOMESTIC  AND  FOREIGN  EXCHANGE 

rl^Xr^""'^^"*    ^"    '"'    °^     *^-    ^it-    for 
trv^Jr  K-^'r''  't  '"!""'*"'*  *°  '"""^  drafts  on  a  coun- 

orawn  in  other  currencies,  owing  to  the  fact  thnt  th. 
^eat  njajority  of  banks  thruout^he  woWd  h    -  Vor 

ro  guard  against  loss  in  the  case  of  countries  in 

phrase  similar  in  nieaninir     Th.  o^  v^'th  a 

them  to  London  for  redemption  at  th.  r     '"'^''"'^"^ 
of  sterling.  "emption  at  the  face  amount 

3   Advices.~A  letter  of  advice  (Figure  2)    .„ 
1.  Number  of  the  draft 


FOREIGN  REMITTANCES 


65 


2.  Amount  of  the  draft 

3.  Date  of  issue  of  draft 

4.  Name  of  payee 

5.  Name  of  bank  at  which  drafts  will  be  presented 
by  bearer  if  other  than  correspondent  drawn  on  (if 


TME  NATTONAL  OTV  BANK 

OF  New  VOIU( 


L  UXIMN  CITY  *  urOUIIO  um.  LTD. 

tONDON.  e.  c. 


W.^u.  M..   «.^   u.„   ,^  ,^„^  j,^„  ^  ^  ^^^^^^^^  ^^  ^^^  ^ 


nil 


^ 


^ 


V 


U" 


Fif.r«E  J.     I.etteh  or  Amirr  (PBMT^^ 


66 


DOMESTIC  AND  FOREIGN'  EXCHANGE 


tlie  draft  is  to  be  reachised  to  bank  at  wl,ich   it 
;;;.M.^J^.„ted.  a  note  t^ 

6.  I'articulars    o,    the    mode    of    reimbursement 
(cover-draft  mclosed,  debit  amount  to  aceount.  eTe.) 

Should  the  draft  be  payable  by  a  third  partv  (see 
above)  for  account  of  the  correspondent  on  whom  it 
;s  drawn  t  „s  third  party  is  al...  advised  either  bv  he 
issumg  bank  direet  or  by  its  .  ..respondent  on  rece  pi 
of  advice  from  the  issuing  b«, , ";.  ^ 

The  relative  adviees  should  be  dispatched  as  soon 
a  possible  after  the  sale  of  the  drafts  in  order  that 
payment  may  not  be  refused  thru  the  correspondent's 

^.Specimen  forms  and  sigmtures.-Bach  bank 
furnishes   he  eorrespondents  on  whom  it  has  arranged 
o  issue  drafts,  with  specimens  of  the  special  draf 
form  and  of  the  special  advice  form  (if  Ly)  it    vi 
use,  together  with  specimen  signatures  of  the  ofRc 
wlio  are  authorized  to  sign  drafts  and  adviees  on  its 
Oehalt.     If    possible,    a   specimen   signature   of   the 
paj-ee  ,s  also  forwar.led  with  the  advice  of  a  draft,  so 
hat  any  possible  .lifficulty  m  establishing  the  boZ 
Pdcs  of  the  payee  an.l  draft  may  be  avoided 

}J'J"'\i  ''?^'*  ""  P"rcha.ser,s.~The  amount  to 
be  charged  1^-  the  issuing  bank  to  the  purchaser  of  a 
demand  draft  s  ascertained  by  adding  together  the 
amounts  mentioned  below:  fe«-t"er  tne 

1.  Face  amount  of  the  draft   (if  drawn  in  a  for- 


FOREIGN  HKMITTAXCES  CT 

eign  currency  the  amount  is  converted  into  local  cur- 
rency at  the  rate  of  exchan^'e  lor  the  day) 
2.  Commission  of  the  issuing  Imik 
a.  Conmiission  (if  any)  of  the  paying  bank 
4.  Cost  of  postage  on  advices. 
6.  Travelers'  c/u-fA*.— Travelers'  checks  enable  a 
traveler  to  provide  iiimself  with  fimds  without  dL-lay 
in  a  convenient  yet  inexpensive  manner,  at  anv  point 
of  his  journey.     They  are  issued  in  denoiniliations 
of  even  amounts  ($10.  r-JO,  $.50,  $100  and  $-i()();  £.-,, 
ilO,   £20,  etc.),   with  the  exact  equivalent   in   the 
moneys  of  the  principal  foreign  countries  stated  on 
the  face  of  each  check.     (See  Figures  3  and  4.) 
They  may  be  cashed  practically  anywhere,  are  self- 
i.lentifying  and  easily  negotiated,  and  are  therefore 
one  of  the  safest  and  best  forms  in  which  to  carry 
money  when  traveling.     They  are  issued  by  all  first- 
class  banks  at  a  small  premium. 

So  far  as  travelers  are  concerned,  such  ciieeks  are 
oft-jn  more  convenient  than  drafts.  The  latter  must 
lie  cashed  in  one  lump  sum  which  may  be  much  larger 
than  the  traveler  wishes  to  carry  on  his  person,  and 
which  may  be  a  positive  disadvantage  if  he  passes  into 
another  country  where  a  different  currency  is  in  use. 
The  checks  are  for  relatively  small  amounts,  can  be 
cashed  as  needed  and  are  generally  accepted  by  hotels 
and  large  stores,  without  imposing  on  the  traveler  the 
burden  of  cashing  them  at  a  bank. 

In  view  of  the  undoubted  a<lvantages  in  their  par- 
ticular sphere  which  travelers'  cheeks  possess  over 


68 


DOMKSTIC  AND  FOREIGN  EXCHANGE 


B 
it 

S 

3 

3 

I: 

3 

1 


'3      . 


Si 

O'S. 


69 


tea 


;s  a  s  S  ^ 


J=    39 


^  ^  ;>  .3 


MICROCOPY   DESOIUTION    TEST   CHART 

(ANSI  and  ISO  TEST  CHART  No.  21 


1.0    !S"-  ia 
1^  1^ 


A  APPLIED  IM/IGE    Inc 

^™-^  165J   East    Uoin    Street 

^^S  Htjchestef,    New   York         'teog        USA 

"■^=  (^16)    482  -  0300  -  Phone 

^=  (716)  288-  5989  -  Fo. 


70       DOMESTIC  AND  FOREIGN  EXCHANGE 

drafts,  their  greater  cost,  the  widespread  nature  of  the 
initial  arrangements  and  the  fact  that  the  exchange 
cluirged  by  correspondents  on  the  checks  is  met  by  tlie 
issuing  bank,  tiie  slightly  higher  commission  charge 
which  is  made  by  banks  for  travelers'  checks  is  fidly 
justified. 

7.  Payment  of  checks.~The  issuing  bank  usually 
holds  the  paying  agents  of  their  travelers'  checks  free 
from  responsibility  in  cashing  such  checks,  provided: 

(a)  The  holder  signs  them  in  the  presence  of  the 
paying  agent. 

(b)  The  signature  of  the  holder  and  that  of  the 
countersigning  officer  agree  with  the  signatures  con- 
tained in  the  relative  letter  of  indication. 

(c)  The  numbers  of  the  checks  are  entered  on  the 
letter  of  indication. 

(d)  The  checks  are  negotiated  within  the  period 
specified  (usually  twelve  months  from  date  of  issue) . 

(e)  The  other  general  terms  of  the  circular  of  in- 
structions are  duly  complied  with.' 

8.  Pfii/mevt  to  holders.— In  countries  specified  on 
the  face  of  the  check  the  face  amount  of  local  cur- 
rency is  paid  to  the  holder  without  deduction  except 
for  revenue  stamps  (if  any).^ 

1  This  circular  of  instructions  is  generally  printed  in  the  principal  com- 
mercial lanpiiajres  for  the  heneflt  of  paying  agents. 

=  Altho  a  fixed  amount  of  sterling  is  specified  for  Great  Britain  on  the 
face  of  travelers'  checks,  it  should  lie  liorne  in  mind  that  the  sterling 
current  in  Australia,  British  South  Africa.  British  West  Indies  etc 
IS  of  a  quite  different  exchange  value.  A  similar  remark  mav  also  lie 
made  regarding  the  colonies  and  dependencies  of  other  countries  which 
use  the  same  currency  (francs,  etc.)  as  the  respective  mother  country. 


FOUKIGX  RKMITTANCKS 


71 


In  other  countries  tlie  equivalent  of  the  sterlinj^ 
amount  is  paid  to  the  holder  at  a  rate  of  exchan<>e 
whieh  includes  the  commission  and  other  eharjjes  of 
the  paying  agent. 

In  countries  where  a  revenue  stamp  is  necessary  tlie 
cost  of  sucii  stamp  is  charged  to  tiie  iiolder  of  the 
check.' 

9.  Redemption  of  ehcekg.—Viml  travelers'  checks 
are  redeemed  as  follows : 

(a)  If  paid  in  North  America,  they  are  forwarded 
to  the  New  York  office  or  correspondent  of  the  issu- 
ing bank  of  redemption  at  the  face  amount  of  dollars 
l)lus  the  commission  agreed  uj)on.- 

(h)  If  paid  outside  North  America,  they  are  for- 
warded to  the  London,  England,  branch  or  corre- 
spondent of  the  issuing  bank  for  redemption  at  the 
face  amount  of  sterling  (or  its  ecjuivalent)  at  the  cur- 
rent rate  of  exchange  plus  commission  at  the  rate 
agreed  upo>i.      ( In  the  case  of  countries  not  s])ecified 

In  such  places  all  travelers"  checks  are  jiaid  at  the  current  rate  fur  pur- 
chasing exchaiifte  on  the  capital  of  the  respective  mother  country. 

I  Hotels,  steamship  coinjianies,  department  stores,  etc.,  usually  accept 
travelers'  checks  in  pmjment  of  enslomers'  arcouiUs,  but  do  not  bind 
tliemsclves  to  cash  checks  fur  the  purpose  of  providing  the  holder  with 
funds. 

-  As  travelers'  checks  paid  in  North  America  are  checks  on  New  York, 
banks  at  points  where  New  York  exchange  is  usually  at  a  premium  often 
make  no  C(mimission  charge  for  cashing  the  checks. 

In  the  case  of  Canadian  banks  which  issue  travelers'  cheeks,  it  is  cus- 
tomary to  redeem  each  other's  checks  at  par  when  the  two  l)anks  con- 
cerned are  rejiresented  locally.  In  other  casts  they  are  redeemed  thru 
the  Clearing  House  or  otherwise  by  any  branch  "of  the  issuing  hank 
whieh  is  convenient  for  the  purpose,  at  the  face  amount  plus  the  usual 
commission  on  cheeks  paid  and  redeemed  in  North  America,  namely, 
'lO  "f  1  P"  cent,  minimum  .5  cents  each. 


72        DOMESTIC  AND  FOREIGN  EXCHANGE 

on  the  face  of  the  check,  the  paying  agent  has  already 
obtained  his  commission  from  tlie  conversion  of  ster- 
ling into  local  currency  and  the  checks  are  therefore 
redeemed  at  the  face  amount  of  sterling). 

(c)  Banks  having  extensive  business  relations  with 
various  European  countries  ocTasionally  appoint  their 
chief  correspondents  in  the  respective  countries  as  cen- 
tral redemption  agents  for  their  travelers'  cheeks. 
In  such  cases  the  paid  ciiecks  are  forwarded  to  tliese 
correspondents  for  redemption  at  the  f^ce  amount  of 
local  currency  plus  the  commission  agreed  upon,  and 
are  debited  to  tlie  account  which  the  issuing  banks 
keep  with  tiiese  correspondents. 

(d)  Hotels,  department  stores  and  private  bankers 
often  hand  travelers'  checks  paid  by  them  to  a  local 
bank  for  redemption,  such  third  parties  being  al- 
lowed a  commission  of,  say,  V,o  of  1  per  cent,  which 
IS  added  by  the  local  bank  to  its  own  comimission  when 
forwarding  the  check  to  a  central  correspondent  for 
redemption. 

10.  Letter  of  indication. — Each  purchaser  of  trav- 
elers' checks  is  furnished  with  a  letter  of  indicatio" 
(P'igure  5),  usually  bound  with  the  list  of  payu 
agents,  specifying  the  numbers  of  the  travelers'  checks 
sold  to  him  and  signed  by  the  purchaser  and  the  officer 
who  countersigned  the  checks.  It  is  indispensable  to 
the  security  of  the  holder  that  this  letter  of  indication 
be  carried  separately  from  the  travelers'  checks. 

A  few  institutions  do  not  issue  a  letter  of  indica- 
ticHi  with  their  travelers'  checks.    In  these  cases  tw» 


;■>  '\i 


rOREIGX  REMITTANCES 


7a 


spaces,  one  at  the  top  and  one  at  the  bottom  (see 
Figure  C),  are  provided  on  the  ehcciv  form  lor  tiie 
signature  of  the  holcjer.  The  first  signature  is  made 
in  the  presence  of  tile  officer  wlio  issues  the  checl<s, 
and  tile  second  in  tile  presence  of  tlie  paying  agent, 
who  compares  tlie  two  signatures  to  establish  their 
identity.  This  system,  however,  readily  lends  itself 
to  forgery  should  the  checks  be  lost  or  stolen,  as  the 
presenter  of  the  cheeks  has  a  copy  of  the  necessary 
signature  before  him  while  signing  the  checks,  or  the 
signature  may  be  lightly  traced  in  pencil  in  the  space 
provided  before  presentation  and  covered  with  ink  in 
the  presence  of  the  paying  agent. 

During  1913  the  Federation  Unkersclle  des  Soci- 
etes  d' Hoteliers  (with  which  the  principal  hotels  of 
the  world  are  associated)  addressed  a  circular  letter 
to  the  various  issuers  '-'  travelers'  checks  stating  that 
in  view  of  the  risk  in  ..Ived,  payment  by  the  leading 
hotels  of  travelers'  checks  of  this  form  would  there- 
after lie  more  or  less  uncertain,  and  suggesting  that 
the  banks  adopt  the  safer  method  whereby  the  speci- 
men signatures  of  the  purchaser  and  the  countersign- 
ing officer  are  given  in  a  separate  letter  of  indica- 
tion. 

11.  Lost  travelers'  checks.— The  same  care  should 
be  taken  of  travelers'  checks  as  of  money,  and  due 
precautions  taken  to  avoid  risk  of  loss.  Should  this 
occur,  however,  the  holder  is  advised  to  communicate 
immediately  by  telegraph  with  one  of  the  redemption 
agencies  of  the  issuing  bank  or  the  branch  at  which 


Ll 

mt 

f  ■ 
,1 

1 

DOMESTIC  .*ND  FORKIGX  EXCHAXGK 


tlie  cliet'ks  were  obtained,  so  tliat  tlie  presenter  of 
such  cheeks  may  be  traced  without  dehiy. 

The  issuing  bank  will  usually  refund  to  tlic  owner 
the  face  value  of  lost  or  destroyed  checks,  or  will  issue 
a  new  supply  in  their  stead,  upon  receipt  of  sufficient 
evidence  of  loss  or  destruction  thereof  and  the  execu- 
tion of  a  satisfactory  bond  of  indemnity,  provided  tlie 
holder  inmiediately  notifies  the  bank  by  telegraph  of 
the  loss  as  mentioned  above. 

Travelers'  checks  are  useful  for  those  carrying  com- 
paratively small  sums  of  money,  as  they  can  be  nego- 
tiated at  hotels,  department  stores,  etc.,  where  it  is 
impossible  to  secure  funds  under  letters  of  credit,  but 
those  who  re(]uire  to  j)rovide  themselves  with  large 
sums,  say,  $1,000  or  over,  will  find  a  letter  of  credit 
more  convenient.  A  good  plan  for  many  travelers 
is  to  carry  both. 

12.  Letters  of  credit. — Tlie  principal  banks  of  the 
world  issue  letters  of  credit  designed  specially  for  the 
use  of  travelers.  They  are  accompanied  by  a  letter 
of  indication  (see  Figure  7),  and  are  of  two  kinds, 
namelj' : 

(a)  Domestic,  drawn  in  local  currency  for  use  in 
the  country  where  they  are  issued  (Figures  8  and 
8 A),  and, 

(b)  Foreign,  usually  drawn  in  sterling  (Figures 
9  and  9A). 

The  holder  of  one  of  these  credits  may  draw  any 
sum  he  desires,  up  to  the  amount  of  the  credit,  thru 
correspondents  at  all  the  principal  places  visited  by 


Tu    OlK    <  "WRL.tlMJMJliNTs; 

t't'iilli'liii'lj. 


whoM'  Mtnulurt'  is  lo  \n-  t'ltimi  l..-luw.  is  the  holdtT  ot  uur  Tiii\.|.i>"  (.li.-,  L. 
an    ltJllu\k^  ; 

N".  X h.No    X .M.;,.,.... 

Ul     lllL'    ll>  IlOIIHIIilMull    ti[    $10. 

*■«     A (o   No    A 

of  thi*  di'iioiuiiiuMoii  o(  $J0. 

^'"     I* to  No     H.  , 

of  the  cl^Doiiiinuiioii  uf  $5U. 

^'o-  C to  No    C 

uf  (111'  di'uuiiiiiiatioii  of  $10U. 

^"-   ^ lo  No     I) iiuluMvt 

uf  tliu  dfiiuuiioutioii  of  $S00. 
We  commeDtl    to  jour  usual  coiirtt-si.*. 

^'"»    'i''»: lUvK 


liirluMvi 
iII<'lu^ivt 
.  ilirlu.sjvi 


SIUNATIRE    OF 


(V/mW  niyriatuie  mast  a'/ief  niHi  the 
counltiHi'jnaturt   mi    (/it-    cfttcJt*.) 


lJ/ti«(  (/*•  iimerlfd  at  the  tiinf  the  checks 
ait   puichaurd,) 


LKTTEU  OF  IXDICATIOX  AC :  OMPAXYIMJ  TH  \VI  1  TUS' 
CHECKS 
Fir.rBE  h 


To  Ot'R    CORRKSPONDENTS: 
Gt'lltlelnpn, 


M 


the  bcari-r  of  thi«  1,'ttiT.  nliii«p  sisnalnre  is  to  be  foiin.1  Iwlow,  hn«  1 n  mi]. 

Iilipii  with  our  Ciroiilar  Letter  of  Credit  No an.;  we  commenj 

to  your  usual  courtesies. 


Fob  The bank 


SinNATfRE   OP 


LETTEU  OF  INDICATIOV  ACCOMPANYINT.  IFTTlFt  OF 
CREDIT 
FiornE  7 


7, 
O 


3 
y. 

o 

M 
H 
H 

W 


X 


FOHKIGX  ItEMITTANCKS 


rt 


FiocM  s.    Ckcuuh  (Dollab)  LEnra  of  Cbedit 


(F«o«^) 


78        DOMI.STIC  AM)  FOREKIN  KXCIIANGK 


^?!l!)ft4finWV-J 


FiouaK  8ii.     Circular  (Dollar)  I.eitek  of  Credit  (Hack) 


Xo. 


ClEClLAK    LetTEK    OK    CkEUIT 

£.... 

ISSUED    By 

TI  K 


Shj. 


HANK. 

To  the  Bankers  '*'••■• 

'lawed  in  o,.r  Letter  of  Indieafwn. 

This  letter  Kill  be  presented  to  ,,o„  I,,, 


in  ulune  favor  ue  hare  opened  a  eredil  of 


fob, 


...  StcrliiKi 

e  avaded  of  bii  .  ,  ,  , 

•'     demand  drafts  on 

'^'"^ Bank;  London. 

■'Chich  u~e  request  that  you  u-ill  negotiate  at  the  eurreut 
rate  of  the  day,  less  your  usual  eharges. 

The  drafts  should  bear  the  follouing  elause  — 

"Drawn  under  Credit  No.  ..  ".  ,;..,     ,     ,  ,  , 

,  .  'hey  should  be 

draun  within  one  year  from  the  date  hereof,  and  the 

date  and  amount  of  eaeh  draft  eashed  are  to  be  entered 

rn  the  space  provided  on  the  back  of  this  letter 

M 

provided  with   a   copy   of   our   Leiier   oflndication. 

"'*^''''°" signature  may  be  found. 

^'"■7''"- Bank. 


CIKCULAK  (STEKLIXG)  I.KTTER  OF  CREDIT 

Fini'TiE  9 
Avn— 7  79 


^i 


SPECIFICATION 


Ok  I'avmknt.s  Mauk  Under  This   I.ittkr 
OK  Credit 


Whc-n 


'         Paid  l)v 


I     Amount 
in 

'     l''i<!iin's 


ClliCl  I.AU  (STEULIXG)  LKTTKU  OK  CRKnii    (Ua.k) 

Figure  9a 

■n 


FOKKKiX  HE.MITTANCKS  gi 

Jnisiiifss  men  niul  tourists  tliriioul  tlic  world.     A  list 
of  vuyiun:  a^fftit.s  i.s  supplici  to  cadi  i)mTlia.stT. 

l.-J.  Payment  to  the  //oW,r. -Tl.e  I  ,>ukT  draws  a 
"alt  on  the  central  corrfSDondciit  of  the  issuing  luiik 
dcMKi.nted  in  the  letter  „.  credit  for  the  ainouot  of 
money  he  recpiires  and  presents  it  to  one  of  the  pav- 
>•>«■  arrets  desip.al.d  i„  the  list  of  pavin-  a^s.  ,  ts 
1  Ik  paying  a«ent  tlu  n  eonipures  the  si-natm-e  m,  'he 
d.-"lt  with  that  Hiven  in  the  relative  letter  of  indica- 
tion and  authenticates  the  signature  of  the  olKeers 
appc-aririK  «'M  the  letter  of  ere.lit  hv  means  of  the  spec- 
miens  he  has  on  Hie.  If  the  si-nalures  are  in  order 
he  makes  payment  and  enters  the  particulars  of  the 
draft  on  the  hack  of  the  'etter  of  credit. 

In  accordance  with  le  usual  hanking  custom  the 
payin^r  a^rent  deducts  his  commission  at  the  time  pav- 
ment  is  made  to  the  holder  of  the  'etter  of  credit  hut 
should  the  letter  of  credit  re.pies  im  to  nuke  'pay- 
ments without  deduction,  his  commission  is  added  to 
the  amount  of  the  <lraft  when  forwarding'  it  for  re- 
demption to  the  branch  or  eorresi)ondent  of  the  issu- 
ing hank  named  in  the  letter  of  credit.  If  the  letter 
of  credit  is  not  drawn  in  local  currencv.  the  payin<r 
agent  makes  payment  at  a  rate  of  exchange  which  in" 
cludes  his  commission. 

The  banker  who  pays  the  draft,  exhausting  the  let- 
ter of  credit,  forwards  it  to  the  central  agent  together 
with  the  draft  for  redemption. 

Advised  or  restricted  letters  of  credit  are  sinnlar  in 
form  to  circular  letters  of  credit,  except  that  they  are 


82        DOMESTIC  AND  FOREIGN  EXCHANGE 


advised  direct  to  the  correspondents  to  whom  they  will 
be  presented  for  payment,  and  specimen  signatures  of 
the  holder  are  forwarded  to  these  correspondents,  so 
that  a  letter  of  indication  is  unnecessary. 

Letters  of  credit  are  available  for  the  period  speci- 
fied thereon  only  (generally  twelve  months  or  less), 
and  paying  agents  should  always  take  care  to  see  that 
this  period  has  not  expired  when  a  letter  of  credit  is 
presented  to  them  for  negotiation. 

14.  Circular  notes. — Circular  notes  (often  written 
in  French)  are  similar  in  form,  payment  and  redemp- 
tion to  travelers'  checks.  They  are  issued  for  fixed 
even  amounts  of  a  given  currency  (pounds  sterling, 
dollars,  etc.),  and  are  payable  at  that  amount  with- 
out deduction  in  countries  which  use  that  currency. 
In  countries  where  the  local  currency  differs  from  that 
designated  on  the  circular  notes,  the  equivalent  of  the 
amount  is  paid  at  the  current  rate  of  exchange.  The 
amounts  of  local  currencies  to  be  paid  to  the  holder 
are  not  specified  on  the  face  of  tlie  note,  and  this 
constitutes  the  chief  difference  between  circular  notes 
and  travelers'  checks  (see  Figure  9b). 

15.  Foreign  money  orders. — There  is  no  cheaper, 
safer  or  more  convenient  means  of  remitting  small 
sums  of  money  to  anj'^  part  of  the  world  than  that  of 
foreign  money  orders  or  bankers'  limited  checks 
(Figure  10).  The  latter  have  fixed  limits  in  vari- 
ous currencies.  For  amounts  in  excess  of  the  sums 
stated,  it  is  cheaper  and  more  convenient  to  purchase 
a  draft. 


FOUKIGX  RKMITTA NCKS 


83 


v  i 


84        DOMESTIC  AND  FOREIGV  EXCHANGE 


FOREIGX  REMITTANCES  gS 

10.  Payment  of  orcIens.-Foreign  ,„o„ev  orders 

su,„^  bank,  as  a  rule,  l.olds  the  paying  agents  of 
l.e.r    ore.gn  money  orders  free  fron.  respo^nsibilitv 
in  casliing  them,  provided: 

form^   ^''^  "'™^-''  °"^'"  """^  '''■""■"  ""  ^^^  P'-^Per 

(b)  The  amount  of  any  one  money  order  does  not 
exceed  the  limit  fixed  by  the  issuing  b^nk 

(c)  The  signatures  of  the  officers  on  the  money  or- 
der agree  w,th  the  speein.en  signatures  of  authorized 
signmg  officers  on  file.  i"<'ri.sea 

(d)  The  money  order  is  presented  for  payment 

(After  the  exp„.at,on  of  this  period  the  money  orders 
a  e  payable  only  at  the  head  office  of  the'^issuing 


PAYMENT  TO    HOLDERS 

(a)  In  Great  Britain  and  Ireland  the  face  amount 
of  .sterhng  .s  pa.d  to  the  holder  without  deduction  Z 
cept  for  revenue  stamps. 

(b)  In  countries  other  than  Great  Britain  and  Ire- 
and  the  equ.valent  of  the  sterling  amount  is  paid  to 

the  holder  at  a  rate  of  exchange  which  include    tie 
eomm.ss.on  and  other  charges  of  the  paving  ajent 
In  countries  where  a  revenue  stamp  is  necesIarM^.e 

«;n,r:t;^,?eT;.zt:'r[;;:';;re';;  -T't  r^^'^'^  *"  '"-"p^vin, 

is  made.  '  '  '""^  en. ..-hmr nt  of  foreign  money  orders 


:-<,'ii 


86       DOMESTIC  AND  FOREIGN  EXCHANGE 

cost  of  such  stamp  is  charged  to  the  holder  of  the  for- 
eign money  order." 

REDEMPTION 

(a)  Foreign  money  orders  paid  in  Great  Britain 
and  Ireland  are  redeemed  by  the  London,  England, 
branch  or  correspondent  of  the  issuing  bank,  at  the 
face  amount  of  sterling  plus  the  commission  agreed 
upon. 

(b)  Foreign  money  orders  paid  in  countries  other 
than  Great  Britain  and  Ireland  are  redeemed  by  the 
London,  England,  branch  or  correspondent  of  the 
issuing  bank  at  the  face  amount  of  sterling. 

17.  Mail  remittances.—To  meet  the  requirements 
of  emigrants  and  to  facilitate  the  transfer  of  sums  of 
money  to  places  where  banking  facilities  are  some- 
what limited,  a  special  class  of  transactions,  called 
mad  remittances,  has  been  instituted.  By  this  system 
a  bank  in  one  country  requests  its  chief  correspondent 
in  another  country  to  pay  a  certain  sum  to  a  specified 
person  in  that  country,  and  incloses  a  draft  in  favor 
of  the  correspondent  to  cover  the  amount  involved  and 
the  correspondent's  commission  (which  is  usually  the 
same  as  for  drafts ) .  The  correspondent  in  the  coun- 
try tlien  forwards  the  amount  (or  its  equivalent  in 
local  currency)  to  the  beneficiarj-  by  registered  mail 

>  To  meet  eases  where  the  issuing  hank  is  aslted  to  specify  on  a  foreign 
money  or<ier  the  actual  amount  of  l<K-al  currency  which  «111  he  paid  to 
the  ''"'cficmrv,  R  fixed  rate  of  exchange  (kronen  i-.J.iO,  francs  iS  10, 
marks  JO  )0,  etc..  to  the  pound  sterling)  is  estahlished  so  that  the  ex- 
pense of  furnishmg  quotations  at  frequent  intervals  m„v  he  avoided 


FOREIGN  REMITTANCES 


87 


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XliMAud  ai»p  pu«  lunoui*  3i])  qjuv  pvoiq* 


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88        DOMESTIC  AND  FOREIGN  EXCHANGE 


or  tliru  its  agents  in  the  town  where  the  beneficiary 
resides. 

In  order  to  make  sure  that  the  amount  reaches  its 
destination  safely,  the  purchaser  is  furnished  by  his 
bank  with  two  slips,  one  a  receipt  for  the  money  he 
has  paid  and  the  other  a  notice  (with  translations 
thereof  in  various  foreign  lan|j;uayes)  for  transn's- 
sion  to  the  beneficiary,  which  instructs  him  (the  bene- 
ficiary) to  conmmnicate  with  the  central  correspond- 
ent if  the  sum  mentioned  thereon  is  not  received  within 
the  course  of  a  fixed  number  of  davs.  ( See  Figure 
11.) 


REVIEW 
Describe  some  of  the  ways  in  which 


What  is  a  demand  draft.' 
drafts  are  paid. 

What  does  a  letter  of  advice  usually  contain.' 
How  are  travelers'  checks  redeemed.' 
Wliat  is  a  letter  of  indication?     Why  is  it  issued.' 
What  kinds  of  letters  of  credit  are  issued?     How  does  the 
holder  secure  payment? 

\yhen  are  paying  agents  of  travelers'  checks  free  from  respon- 
sibility in  cashing  such  checks.' 


CHAPTER  VI 


BILLS  OF  EXCHANGE 

1.  Bills  of  exchange. — It  has  already  been  indicated 
that  the  fundamental  purpose  of  a  draft  or  bill  of  ex- 
change is  to  settle  debts  and  thus  avoid  the  necessity  of 
shipping  gold.  To  satisfy  a  debt  in  one  country  by 
offsetting  the  amount  against  a  debt  due  in  another 
country,  leaving  only  the  difference,  if  any,  to  be  re- 
mitted in  gold,  is  no  less  effective  a  means  of  payment 
as  a  double  shipment  of  money,  and  is  obviously  far 
more  economical.  In  this  way,  the  difference  or  bal- 
ance of  payments  as  it  is  called,  is  settled  by  the  debtor 
nation  siiipping  gold  or  arranging  a  postponement  of 
payment  by  means  of  finance  bills  or  other  corrective 
transactions. 

A  check  is  merely  a  demand  biji  of  exchange  d.awn 
on  a  bank.  Bills  of  exchange  or  drafts,  as  we  shall 
now  call  them,  assume  a  variety  of  forms  and  tenor, 
but,  no  matter  what  their  currency  or  form,  the  un- 
derlying principle  is  the  same,  namely,  that  of  a  cred- 
itor drawing  a  draft  upon  an  actual  or  constructive 
debtor. 

Bills  of  exchange  can  be  broadly  divided  into  two 
classes  according  to  their  currency,  known  as  short 
and  long  exchange. 

89 


•iiirf 


90       DOMESTIC  AND  FOREIGN  EXCHANGE 

Short  exchange  includes  cable  transfers,  checks, 
bank  drafts  and  sight  or  demand  drafts.  Travelers' 
checks,  money  orders  and  other  forms  of  non-com- 
mercial remittances  come  under  this  heading. 

Long  exchange  includes  all  drafts  with  a  currency 
of  eight  days  or  over,  such  as  thirty  and  sixty-day 
commercial  bills  and  bankers'  long  bills. 

2.  Sight  drafts.— Checks  and  demand  or  sight 
drafts,  whether  drawn  on  a  bank  or  a  commercial 
house,  have  no  days  of  grace  for  payment  and  must  be 
paid  on  presentation,  or  protested.  As  a  rule  the  sale 
of  demand  exchange  is  confined  principally  to  banks, 
commercial  draf+s  being  usually  drawn  on  time. 

The  rate  or  price  of  demand  or  sight  exchange,  un- 
der modern  conditions,  may  be  considered  as  the  basic 
rate  on  which  all  rates  for  time  exchange  are  calcu- 
lated. The  old  usance  or  sixty-days'  rate,  obtaining 
between  London  and  New  York,  on  which  rates  used 
to  be  calculated  is  a  relic  of  the  days  of  slow-going 
sailing  vessels.  In  practice,  of  course,  given  the  rate 
of  interest,  the  rates  of  exchange  are  quickly  con- 
verted from  one  to  the  other.  Under  normalcondi- 
tions,  a  sight  draft  drawn  in  New  York  or  London 
will  be  presented  and  paid  six  to  eight  days  after  nego- 
tiation in  New  York,  and  is  therefore,  as  regards  time 
lost  in  transit,  on  a  par  with  a  shipment  of  gold. 
The  difference  between  the  export  gold  point  and  the 
demand  rate  is  represented  by  the  freight,  insurance 
charges,  etc.,  on  the  shipment  of  gold.  It  is,  of  course, 
necessary  for  banks  transacting  a  regular  foreign  ex- 


BILLS  OF  EXCHANGE 


91 


- 
en  1»> 


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9»        DOMKSTIC  AND  FOREIGN'  KXCIIANGE 

change  business  to  maintain  balances  with  the  various 
foreign  correspondents  against  >vhich  thev  can  draw 
demand  drafts  and  sell  cable  transfers.  '  Funds  for 
these  balances  are  provided  by  remitting  quantities  of 
different  kmds  of  exchange  which  have  been  purchased 
from  customers  and  others.     Demand  and  other  short 
date  Items  are  credited  immediately;  acceptance  is  ob- 
tained of  the  longer  date  items  wliich  are  discounted 
and  credited  by  the  correspondent  as  occasion  requires. 
The  selling  of  demand  exchange  and  cables  against 
remittances  of  the  same  is  the  most  elementary  form 
of  foreign  exchange.     A  banker,  for  instance,  pur- 
chases  a  demand  draft  on  London  for  £10,000  at  the 
current  rate  of  exchange,  say  $4.8f5,  and  remits  the 
bill  to  his  London  correspondent;  at  the  same  time  he 
sells  his  own  check  or  checks  on  London  for  the  same 
amount  at,  say.  $4.86'L.;  the  two  transactions  reach 
London   by  the  same  mail  and  offset  each  other 
Apart  from  the  expense  of  conducting  his  business, 
he  clears  $.50  on  the  transaction  and  is  not  out  of  the 
use  of  his  money  for  more  than  a  few  hours  at  the 
most.     If  the  checks  sold  by  the  banker  miss  the 
mails  by  any  chance,  the  banker  has  the  use  of  the 
money  in  London  until  the  mail  is  received;  hence  the 
importance  of  watching  the  mail  service  closely  in 
exchange  transactions.     This  illustration  is,  of  course 
elementary  and  bankers  do  not  often  make  money 
this  way;  but  it  shows  the  principle  on  which  foreigii 
exchange  transactions  are  based.     Banks  are  con- 
stantly purchasing  every  kind  of  exchange  and  for- 


BILLS  OP  EXCHANGE 


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9*   DOMESTIC  AND  FOREIGN  EXCHANGE 

warding  it  to  their  foreigi,  crrespondeiits  In-  whom 
1  IS  converted  into  «n  available  balance.  In  any  case 
there  IS  constantly  accun.ulatinK  t<.  the  cre.lit  of  the 
Aew  \o,k  hanker  a  balance  against  which  he  is  able 
to  sell  exchange  and  cables  and  meet  Lis  maturing 
obligations,  l/ndcr  normal  conditions,  owing  to  the 
rclmbihty  of  the  mail  service,  a  banker  is  able  to  esti- 
mate very  closely  the  position  of  his  London  balance 
and  as  a  rule  receives  a  cable  from  his  correspond- 
ent at  the  end  of  each  day. 

«.  Cable  transient.— A  cable  transfer  or  "cable  "  as 
It  IS  more  generally  called,  is  a  transfer  of  funds  by 
cable,  no  question  of  interest  being  involved  as  pay- 
ment IS  immcliate.     Ajart  from  this  a  '•cible"  di..ers 
Iron,  a  check  only  in  the  fact  that  the  banker  abroad 
IS  told  by  a  cable,  instead  of  l,y  a  written  or<ler  or 
check  sent  by  mail,  to  pay  out  the  money.     The  cable 
<Iispatches  should  be  sent  the  night  before,  or  early 
on  the  morning  of  the  day  on  which  payment  is  due"; 
otherwise,  owing  to  the  difference  of  time  between 
.New  \ork  and  London,  the  London  bank  will  be 
closed  and  the  payment  delayed  until  the  following 
<  ay.     As  the  money  is  received  and  paid  on  the  same 
day,  It  IS  obvious  that  the  banker  must  charge  a  higher 
rate  of  exchange  for  a  cable  than  he  would  for  a  check 
because  he  has  the  use  of  the  amount  of  the  latter 
while  It  is  in  transit.     The  mail  time  between  the  two 
points  involved  and  the  en,  rent  interest  rate  at  the 
paying  point  are  the  main  factors  which  determine  the 
difference  in  the  rate  of  exchange  between  cables  and 


BILLS  OF  EXCHANGK 


95 


•lemand  drafts.  The  lii«her  the  rate  of  interest  and 
the  slower  the  mail  steamer,  the  more  the  (juotations 
diverge.  With  a  demand  rate  of  exchange  at  .Hi.HC, 
an  eight-day  steamer  and  a  Loncion  market  rate  at 
4%  per  cent,  the  cahle  ecjuivalent  would  he  •i.8«.J2, 
4.864- .00.52  (8  days'  interest).  These  rates  are  ren- 
dered more  or  l.ss  diver^a-nt  aeeording  to  the  sui)piy 
of  or  demand  for  ehecks  and  eahles  respeetively. 

4.  VnuHual  rata  fur  eahlen.—U  has  already  been 
noted  that  the  outbreak  of  the  European  war  raised 
eable  rates  on  London  to  an  unpreeedented  jujint. 
In  his  work  on  "International  Kxehange"  Mr.  A.  ^V. 
Alargraff  summarizes  the  eonditions  whieh  produce 
abnormal  rates  as  follows: 

1.  Flurries  on  the  New  York  Stock  Exchange  with  the 
incidental  abnormal  high  rates  for  money,  frefjuently  induce 
New  York  bankers  to  sell  their  checks  on  London  for  amounts 
largely  in  excess  of  their  cash  credit  1  lances  in  the  hands 
of  their  London  bankers,  and  enabl-s  them  to  relieve  the 
stringency  of  the  money  inarkei  and  at  the  same  time  obtain 
a  higher  rate  of  interest  by  loaning  the  money  realized  in 
selling  their  London  checks. 

The  manner  of  covering  these  checks  prior  to  their  presen- 
tation for  payment  in  London  is  and  can  be  effected  only 
thru  the  purchase  of  cable  transfers,  and  these  operations 
when  indulged  in  extensively,  naturally  create  a  brisk  market 
demand  for  cable  transfers,  and  fancy  prices  in  many  in- 
stances have  to  be  paid. 

2.  Exceptionally  high  rates  for  London  checks,  cause<l  by 
an  unexpectedly  heavy  inquiry  and  a  scant  supply  of  coin- 
nicrcial  biUs  of  exchange,  might  tempt  the  aggressive  banker 
to  avail  himself  of  the  high  price  by  selling  his  checks  on 
London  short,  basing  his  calculations  on  a  decline  in  the 


'4-\\ 


96        DOMESTIC  AND  FOREIGN  EXCHANGE 

price  of  exchange,  during  the  transit  of  his  checks  to  a  point 
where  he  can  buy  cable  transfers  in  reimbursement  for  up- 
proxnnately  tiic  same  rate  lie  sold  his  checks,  and  in  that 
event  he  would  have  had  the  free  use  of  the  proceeds  of  his 
sale  of  checks  in  the  interim  for  loaning  purposes. 

Unforeseen  circumstances  often  offset  the  calculations  of 
the  financier,  and  instead  of  the  anticipated  decline,  tlie  mar- 
ket has  remained  stationary  or  in  fact  had  an  advance  and 
in  the  face  of  these  conditions  the  many  short  sales  of  checks 
must  still  be  covered  by  cable  transfers  at  about  any  price 
the  seller  may  dictate. 

3.  The  fortnightly  settlement  days  on  the  London  Stock 
Exchange  occurring  about  the  middle  and  the  end  of  eacli 
month  influence  alsc  the  price  for  cable  transfers,  and  New 
York  banking  firms  engaged  in  transactions  in  tlie  London 
market  frequently  are  called  upon,  especially  in  a  wide  and 
fluctuating  market,  to  protect  their  operations  by  the  cash 
payment  on  these  days,  of  very  large  sums  of  money  that  are 
transferred  by  telegraph  and  result  in  a  heavy  demand  for 
cable  transfers. 

4.  There  are  many  bankers  not  averse  to  having  their  for- 
eign accounts  show  a  debit  balance  at  various  times  thruout 
the  half-yearly  account  periods,  and  who  thru  a  sentiment  of 
pride  and  an  implied  request  on  the  part  of  their  European 
friends,  always  close  their  accounts  on  30th  June  and  31st 
December  with  a  liberal  cash  credit  balance  created  in  most 
cases  at  the  last  moment  by  the  purchase  of  cable  transfers. 

The  demand  for  cable  transfers  thru  this  source  is  sufli- 
ciently  large  to  induce  some  bankers  to  establish  large  credit 
balances  with  their  London  friends  during  the  months  of 
June  and  December,  thereby  placing  themselves  in  a  position 
to  sell  cable  transfers  on  29th  June  and  30th  December  at 
the  advanced  prices  which  usually  obtained  then. 

5.  Long  exchange.— L,or\g-i\mc  drafts  inay  be 
divided  into  bankers'  long  bills  and  commercial  long 
bills;  both  classes  are  drawn  at  sixty  or  ninety  days 


BILLS  OF  EXCHANGE 


97 


after  sight,  except  in  special  cases,  when  the  time  limit 
may  be  longer. 

Commercial  long  bills  with  or  without  documents 
attached  are  drawn  on  foreign  debtors  by  merchants 
and  exporters  against  shipments  of  goods  abroad; 
they  are  usually  purchased  by  bankers  who  remit 
them  to  their  foreign  correspondents  for  collection 
and  credit  and  sell  their  own  bills  against  the  balance 
so  created. 

When  a  bill  of  exchange  is  drawn  for  the  exact 
value  of  the  goods  exported  and  has  the  bill  of  lading, 
insurance  certificates,  etc..  attached,  it  is  known  as  a 
"documentary"  bill  of  exchange.  It  is  accomjx-inied 
by  instructions  attached  to  surrender  tlie  documents 
on  payment  (D/P)  or  on  acceptance  (D  A ) .  If  no 
documents  are  attached  to  a  bill,  it  is  known  as  a 
"clean"  bill  of  exchange.  Bankers'  bills  are  invari- 
ably clean  bills,  while  commercial  bills,  unless  drawn 
by  a  house  of  liigh  standing  on  another  of  equal  rating, 
are  usually  documentary. 

Bills  of  exchange  and  the  accompanying  docu- 
ments are  usually  drawn  in  duplicate.  TJie  originals 
are  forwarded  on  the  first  outgoing  steamer,  the 
duplicates  are  sent  by  tiie  next  mail.  Sometimes  tlie 
second  bill  of  exchange  is  retained  until  a  satisfactory 
sale  can  be  made,  in  which  case  the  maturity  of  the 
bill  is  based  on  the  date  that  the  first  of  exchange  was 
accepted  in  London,  accurately  determined  by  the  ar- 
rival of  the  mail  boat.  The  second  bill  of  exchange 
bears  the  name  and  address  of  the  holder  of  the  ac- 


lis 


-  ii 


98       DOMESTIC  AND  FOREIGN  EXCHANGE 

cppted  bill.  Before  payment  the  duplicate  is  at- 
tached to  the  original.  A  bill  of  exchange  may  be 
taken  up  any  number  of  times  before  it  is  due  and 
be  put  into  circulation  between  each  payment,  but 
once  it  is  paid  by  the  acceptor  on  its  becoming  due  it 
cannot  again  be  put  into  circulation. 

6.  Influence  of  the  interest  rate.— A  bill  drawn, 
say,  on  London  at  sixty  days  after  sight  is  obviously 
not  worth  as  much  to  the  purchaser  as  a  demand  bill. 
He  has  to  pay  for  a  sixty-day  bill  on  delivery,  send 
It  over  to  London,  obtain  acceptance,  and  wait  sixty- 
three  days  after  acceptance  before  the  bill  matures 
and  is  paid;  in  other  words,  there  is  sixty-three  days 
difference  between  the  currencies  of  a  demand  and  a 
sixty-day  bill.  Should  the  purchaser  find  it  incon- 
venient to  await  the  maturity  of  the  bill,  he  can  in- 
struct his  correspondent  in  London  to  discount  it  ac 
the  current  rate,  and  have  the  proceeds  placed  to  his 
credit.  In  all  exchange  calculations,  therefore,  the 
rate  of  interest  is  based  on  the  current  rates  obtaining 
in  the  country  on  which  the  bill  is  drawn;  this  rate 
varies  slightly  according  to  the  nature  of  the  bill. 
The  rates  applicable  to  various  classes  of  bills  are, 
roughly,  as  follows: 

Clean  bills  drawn  on  bankers— private  discount 
rate. 

Clean  bills  drawn  on  first-class  firms— M%  above 
private  discount  rate. 

Bills,  with  documents  deliverable  on  acceptance— 
A%  below  Bank  of  England  minimum  discount  rate. 


BILLS  OF  EXCHANGE 


99 


Bills  drawn  at  over  sixty  days  sight,  bear  a  higher 
rate  of  discount,  as  a  rule,  than  the  market  rate  for 
sixties,  owing  to  the  element  of  risk  on  account  of  the 
possible  change  in  the  discount  rate  during  the  cur- 
rency of  the  bill.  It  is  obvious  that  if  the  London 
rate  of  discount  hap])ens  to  be  higher  than  the  Xew 
York  rate,  the  purciiaser  of  a  sixty-day  bill  would 
probably  prefer  to  allow  the  bill  to  run"  to  maturity 
rather  than  discount  it  in  London  and  use  the  pro- 
ceeds in  New  York.  Conversely,  if  the  London  rate 
was  the  lower  he  would  prefer  to  discount  the  bill  and 
withdraw  the  proceeds  for  use  in  New  York.  J'rom 
the  foregoing  it  will  be  seen  that  the  London  rate 
has  a  powerful  influence  on  the  exchange  market. 
The  higher  the  rate  of  discount  the  greater  the  di- 
vergence between  the  rate  of  exchange  on  long  and 
short  bills  on  London.  A  change  in  the  interest  rates 
of  either  London  or  New  York  is  immediately  re- 
flected in  the  price  of  any  bill.  The  conversion  of  a 
demand  rate  to  a  sixty-day  rate  includes  an  allowance 
for  interest  and  British  revenue  stamps  (l  shilling 
per  £100>  With  a  demand  rate  of  t.87  and  a  pri- 
vate disi  ,  jnt  rate  in  London  of  31/2  per  cent,  a 
banker's  clean  bill  is  worth  4.8385  as  the  following 
calculation  shows : 


i; 


i*  J 


1. 


!■•  ■  ml 


mini 


New  York  demand  rate  on  London 
less  63  days'  interest  at  3^%  .  .   2.93 
Stamp  duty  %o  7c 24 


$487.       per  £100 

3,17 
$483.83 


.i    i 


100      DOMESTIC  AND  i'OREIGN  EXCkANGE 

or  the  nearest  commercial  rate,  $4.8385  per  pound 
sterling.  Elsewhere  it  has  been  shown  tliat  exchange 
rates  between  two  countries  either  correspond  or  tend 
to  correspond;  this  apphes,  however,  only  to  the  de- 
mand rates. 

7.  Commercial  long  bills. — Commercial  long  -Ms 
are  drafts  drawn  at  thirty  days  or  over  by  exporters 
on  foreign  customers,  or  upon  banks  abroad  desig- 
nated by  the  latter.  A  bill  of  this  kind  is  usually  ac- 
companied by  a  bill  of  lading  and  other  documents. 
Where  a  draft  is  drawn  on  a  very  good  house  abroad, 
or  a  bank,  the  documents  are  delivered  upon  th  ac- 
ceptance of  the  draft.  Such  drafts  are  known  as 
"acceptance  bills"  or  D/A. 

Where  the  drawee's  standing  is  less  well-known  or 
where  the  merchandise  is  perishable,  documents  are 
delivered  only  on  actual  payment  of  the  drafts. 
These  drafts  are  known  as  "payment  bills"  or  D/P. 
In  the  case  of  a  draft  marked  D/A,  the  drawee 
can  obtain  possession  of  the  relative  goods  as  soon 
as  he,  or  the  bank  representing  him,  has  accepted 
the  draft.  If  the  draft  be  marked  D/P,  the  drawee 
must  pay  the  draft  (less  a  rebate  for  any  unex- 
pired time  it  has  to  run  to  maturity)  before  he  can 
obtain  the  merchandise.  When  D/JP  bills  are  drawn 
against  perishable  goods  they  are  invariably  taken 
up  "under  rebate."  Payment  bills  are  not  discount- 
able, even  after  acceptance,  as  they  are  liable  to  be 
paid  any  tune  before  maturity  and  must,  therefore, 


BILLS  OF  EXCHANGE 


101 


remain  in  the  portfolio  of  the  banker  who  presented 
tiiein  for  acceptance.  'Acceptance  bills,"  on  the 
other  hand,  become  clean  bills  after  acceptance,  they 
are  discountable  in  the  London  discount  market  and 
may  change  half  a  dozen  times  before  maturity. 

The  purchase  of  documentary  bills  drawn  by  re- 
liable firms  is  a  fairly  safe  operation,  the  buyer  being 
protected  by  the  bill  of  lading  which  is  indorsed  to 
him,  but  judgment  should  be  exercised  as  regards  the 
financial  standing  of  the  drawer  and  drawee,  es- 
pecially in  the  case  of  "acceptance  bills,"  and  consid- 
eration should  be  given  to  the  nature  of  the  relative 
goods. 

8.  Bankers'  long  bills. —Uraihs  drawn  at  sixty 
and  ninety  days  sight,  on  foreign  correspondents  by 
bankers  in  the  United  States  and  Canada,  form  an 
important  factor  in  international  exchange  opera- 
tions. These  bills  originate  in  the  regular  course  of  a 
foreign  exchange  business  and  are  based  on  a  variety 
of  transactions.  Many  of  them  are  thirty  and  sixty- 
day  bills  and  are  sold  to  customers  of  the  bank,  who 
prefer  this  method  of  remittance  to  that  of  purchas- 
ing demand  drafts  or  cable  transfers.  Some  arise 
from  a  desire  to  anticipate  a  change  in  the  rate  of 
exchange,  while  others  represent  purely  financial 
transactions,  such  as  placing  a  foreign  loan  in  New 
York.  These  latter  operations  are  explained  in  the 
rhapter  on  Finance  Bills. 

9.  Bills  of  exchange  that  involve  more  or  less  risk. 


102 


DOMESTIC  AND  FOREIGN  EXCHANGE 


-Concerning  the  risk  incurred  in  the  purchase  of 
documentary  exchanr      A.  W.  Margraff  in  his  book 
International  Exchange"  writes  as  follows: 

merchandise  can  be  readily  resold  in  the  market  w^iere  con- 
signed m  the  event  of  forced  sale  by  reason  of  non-a  ceptance 

tiZ^l^r^'l  ^/  *'''  ^''^'''  "^  the  appertaining  bill   and 
the  inability  of  drawers  to  reimburse  the  purchafer  of  the 

expors"  ''''"""'  '"'  ''^'^  """'""*  originall/paid  them   pll: 

fn  JpH  ^'^"'"^'"ff^^'i  upon  merchandise  disposed  of  under 
forced  sale  would  be  applied  on  account  of  the  amount  of 
rennbursement  demanded  of  drawers,  and  provided    he  ir 
chand.se  was  of  the  nature  just  referred  to,  would  almost 
liquidate  the  purchaser's  claim  against  the  drawers   and  th. 

"l;  lS"dV"!l  'r  *°  *^  P"-''--  may  be  ;e:ol red 
«ith  httie  difficulty  from  the  drawers.     If,  however    tliev 

i'creJ.-;     '  '"■"^'  •T"""'^'  t*-^"  '"^^  Purchlser  would  hS 
drawers  ^"  '"""^  ''"''""'^  "g-*'"^'  ^^e  insolv^;! 

th^'7'  f  °r'^*i^  °^  '"*  *  '°^^  '^  ^"y  ^mote  in  view  of 
the  fact  that  the  majority  of  drawers  of  bills  of  excZne, 
(exporters)  have  all  refused  bills,  immediately  re/erredfo 
their  own  agents  abroad  for  protection 
other^t ''"f'*  non-perishable  merchandise  includes  flour  and 
other  manufactured  cereals  such  as  corn  meal    oat  n,.,I 
hominy  etc. ;  farming  implements,  canned  meats  'fresh  ml' 
and  other  provisions,  when  the  fresh  meats  Jd  prov^Lns 
are  shipped  m  refrigerator  cars  and  vessels  of  modertZ 
and  warehoused  in  cold-storage  plants  upon  the  arrhafa 
destination,  ,f  not  immediately  taken  up  by  drawees 

BtlU  mvoktng  more  or  less  rM.-Hms  accompanied  bv 
documents  representing  shipments  of  perishable  merchandise, 
such  as  butter,  cheese,  fresh  fruits,  etc.,  that  are  liable  to 
deterioration  in  quality,  or  to  absolute  loss,  during  trans  t! 


BILLS  OF  EXCHANGE 


103 


Bills  with  documents  shoning  collateral  security  of  live 
cattle,  horNts  or  other  live  animals,  necessitating  the  expense 
of  help  and  feed  during  transit  for  tiie  maintenance  of  life, 
as  a  refusal  of  such  annexed  bill  would  depreciate  the  value 
of  the  security,  day  by  day,  to  the  extent  of  such  expense 
incurred. 

In  addition  to  the  liability  of  drawers  and  indorsers,  if 
any,  purchasers  of  documentary  bills  are  secured  bv  the 
financial  responsibility  of  the  acceptors  on  and  after  accept- 
ance until  actual  payment  of  the  bills. 

^  The  liability  of  drawers  continues  after  the  acceptance  of 
bills,  remains  in  force  during  the  whole  life  of  the  bills  and 
ceases  only  upon  payment. 

The  primary  conditions  of  the  desirability  of  the  purchase 
of  any  bill  of  exchange  depend  upon  the  moral  and  financial 
standing  of  the  parties  thereto,  and  the  liabilities  just  stated 
of  the  parties  should  be  quite  ample  in  the  majority  of  cases. 
Further,  these  bills  possess  another  element  of  protection 
against  a  possible  loss  in  this,  that  they  are  supplemented 
by  documents  covering  salable  merchandise  with  title  con- 
tinuing in  the  purchaser  of  the  bills  until  payment  at  matu- 
rity, or  retirement  prior  to  maturity,  of  the"  respective  bills 
of  exchange. 

APPLICATION-  FOR  COMMERCIAL  CREDIT 


yew   York 

(lUARANTT   TBU3T   COMPANY    OF    New    YoRK. 

Dear  Hirt. 


Credit  in  favor  of 


Pleane  iftstie  for  ovr  arronnt  a  Documentary 


for   £ drnflf    at . 

against cont  of  thipmeiit  of . 

from to 


In  force  until  firtt  day  of. 

Insurance   effected  in 

Kindly  advite  the  Credit  by 

CABI.E 

Mail 


Touri  truly, 
FioDU  14. 


10*     DOMESTIC  AND  TOREIGN  EXCHANGE 


CniM  No 

J^ aierlinf 


GlARAK'n-  TRUST  COMPANY  OF  NEW  YORK 


Xtw  York,. 


.1». 


.moy 


To  lk§  GuAiAHTY  Tivrr  CoHrAXY  or  Nsw  Yubk, 
33  LoM BAftn  Street, 
London. 
Otnthmun: 

At  tht  requett  and  for  aceoant  of 

Wf   h»rtby  aut\orize '       ' 

or  an;i  partitt  vkutt  drtifta  yuu  mnii  be  lUrevlnd  bit icrittea  iiidrr   or 

by  «,  to  aei-tpt  undtr  this  credit,  to  value  on  you  at fur  nnv 

•mn  or  >um>  not  exceeding  in  all 

Poandt  Sterling  (tay  £ Sterliny)  to  be  uned  at. . 

direct  for invoice  coat  of 

to  be  piirehiited  fur  account  of 

mnd  to  he  ehipped  to  a port  in  the  Umted  Stolen 

The  Bille  muet  be  drawn  in 

prior  to  the  firtt  day  of 

and  advice  thereof  yirrn  to  you  in  orii/innl  and  duplicate,  Much  advice  to 
be  accompanied  by  Bill  of  Lading  filled  up  to  order  of  the  Guaranty 
Truet  C'oKipBnj/  of  Xew  i'ork  (with  copy  of  invoice)  for  the  properly 
thipped  an  above.  r     r      j 

All  the  Bille  of  Lndiny  iteued,  except  one  eent  to  us  bv  the  veetel 
carrying  the  cargo,  and  one  retained  by  the  captain  of  the  tai'd  reatel.  are 
to  he  forwarded  direct  to  yon.  Copy  of  incoice,  properh)  certified  by  the 
V.  .S.  Contul  to  be  forwarded  to  us  by  the  vessel,  also  advice  of  each  Bill 
drawn. 

And  ite  hereby  agree  with  the  dratrers,  endorsers,  and  bona  fide 
holders  of  Bills  drown  under  and  in  compliance  with  this  rrnlit.  that  the 
tame  eball  it  duly  honored  on  preaenlation  al  your  office  in  London. 
We  are,  Oentlemen, 

y'oi,^  obedient  servants, 
Gunranty  Trust  Company  of  Xew  York 
I'll 

Manager, 

N.B.  Bills  drawn  under  this  credit  must  be  marked  Drawn 

under  Ouaranty  Trust  Company  of  Ifeic  York 

Letter  nf  Credit  .Vo dated 

for  £ 

Insurance  in  order  at 

FrGTRE  15, 


BILLS  OF  EXCHANGE 


105 


y<iw  York, 11)1 

T»tlu 

GUARANTY  TULST  COMPANY  OK  NEW  YORK 
OtntUmen: 

Uminij  received  from  you  the  Letter  of  Credit  of  which  a  true  copy  i, 
on  the  other  Me,  ^^  hereby  agree  to  it,  term,,  and  in  coneideralion 
thereof  ^^  ayree  leith  you  to  proride  in  Xew  York,  twelve  dayi  precioue 
to  the  Maturity  of  the  Hill,  drawn  in  virtue  thereof,  ,ufici,'nt  fund,  in 
ca,h.  or  .«  1J,U,  «»  London.  ,ali,factory  to  you.  at  not  exceeding  ,Uly 
day,-  ,i,jhl,  and  endoreed  by  ""  ,  to  meet  the  payment  of  the  ,ame  with 
■■■■■per  cent  commi„ion  and  intereit  a,  hereinafter  pro- 
dded, and  ^.^  u-uiertake  to  in.ure  at  ™*  ,xpen,e.  for  your  benefit. 
ayainH  rUk  of  /■•ir,  of  Sea,  all  property  purcha.ed  or  thipped  pureuant 
to, aid  Letter  of  Credit,  in  Companie,  ,ali,factory  to  you 

^.^agree  that  the  title  to  all  property  which  thall  be  purchaeed  or 
thipped  under  the  ,aid  credit,  the  bill,  of  lading  thereof,  the  policie, 
of  ,n,urance  thereon  and  the  whole  of  the  proceed,  thereof  thall  be  a,Z 
renuun  tn  you  until  the  payment  of  the  bill,  referred  to  and  of  all  ,um, 
that  may  be  due  or  that  become  due  on  ,aid  bilU  or  otherwiee,  and 
until  the  payment  of  any  and  all  other  indebtedne,,  and  liability  now 
exiiting  or  now  or  hereafter  created  or  incurred  by  ""  to  you  on  any 
and  all  other  tramaction,  now  or  hereafter  had  with  you,  with  aulhoritu 
to  take  po,,e„ion  of  the  ,ame  and  to  di,po»e  thereof  at  your  di,crelion 
for  your  retmbureement  a,  nfnre.md.  at  public  or  pricate  ,aU  without 
demand  or  notice,  and  to  charge  all  expen,e,,  including  commiesion  for 
tale  and  guarantee.  ' 

Should  the  market  value  of  ,aid  merehandine  in  -Yeai  York  either  be- 
fore or  after  il,  arrical,  fall  m  that  the  net  proceed,  thereof  tall  ex- 
pemea,  freight,  dulie,,  etc.,   being   deducted)    would   be   intufflcient   to 


cover  yvur  advance,  there  against  with  commitmn  and  interest     '    fur 

'  we  ' " 


I 


Iher  agree  to  give  you  on  demand  ami  further  eerunly  vou  mnu  require 
and  in  default  thereof  yon  «l,nll  he  entilled  to  tell  tnid' nierchandiee  forth- 
with, or  to  tell  -to  arriee."  irrespective  of  the  maturity  of  the  accept- 
ance, under  this  Credit,  J^  being  held  responsible  to  you  for  any  deficit, 
which  J,  hind  and  oblige  J^7,^[f^,  to  pay  you  m  cash  on  demand. 

It  i,  vnderttood  that  in  all  payment,  made  by  ""  to  you  in  the  United 
Htate,,  the  Pound  fllerlln^  shall  he  calculnled  nl  the  current  rate  of 
exchange  for  Bankers  Bilk  in   A>,r    York  on  London,  existing  at   the 

FiomE  16. 


106      DOMESTIC  AND  FOREIGN  EXCHANGE 

limt  of  „tHtmtnt,  a«d  tknl  i»l,r„l  .hall  he  rharg,d  at  thf  rate  of  Hr. 
Should  l^antUiyal,  the  payment  of  an,/  portion  of  the  amount  pay- 

°'«ri.iT;;  ^tita'nf'i^:'  -' " ""  -^ ""-  "^ «'"  -"^ "-  -- 

In  CH.e  ^,  ,hoM  hereafter  de.ire  to  have  thh  credit  eonfirmed.  al- 
tered or  emended  by  cable  (uh>ch  will  be  at  ^^^  erpenee  and  ri.k)       ' 

»urA  chanye  elm  I  iiriae  from  the  oeeegHit,,,  ,.l  ,.L  rreait,  ■u.-liethtr 

orfron.  the  death  or  .ece..ionof'::rVar;i"o:"!Zr  '"""""■ 

It  «  further  understood  and  ayreed  i,.  the  event  If  anyZpen.L, 
or  fadure,  or  ae.iynmeni  for  the  benefit  of  creditor,  oa  ^^^part.  or  o, 
the  nonpayment  at  maturity  of  any  acceptance  made  by  "" ,  or  of  the 
nonfulfillment  of  any  obliyation  under  .aid  credit  or  under  any  other 
credit  ie.ued  by   the  Guaranty   Tru.t  Comi«.ny  of  Aeu^   york  on    "■-" 

our 

account,  or  of  any  indebtednee,  or  liability  „„  ^^^part  to  you,  all  obK- 

yation,   acceptance,,  indebledre.,  and  liabilitie,  u-hat.oever  shall  there- 

'ZVe'coZyurZ  ta^yaTle""'"""'  """■""■  »"*"""  -"""-/"^ 

FiniRE  16.     (Continual  ion) 

10.  Letters  of  credit.— There  are  two  well-known 
forms  of  letters  of  credit: 

1.  Circular  letters  of  credit,  to  be  used  by  travelers  anS 
tounsts.  These  are  addressed  to  the  foreign  correspondent 
of  the  issuing  bank  m  favor  of  the  holder. 

2.  Commercial  letters  of  credit,  to  be  used  in  trade.  These 
take  the  form  of  a  letter  addressed  by  a  bank  to  a  foreign 


BILLS  OF  EXCHANCJK 


107 


merchant,  aullmrizing  him  to  draw  on  the  issuing  bank's  ror- 
ri'.-(i)oii(loiit  in  a  tirtiiin  place  (ffi'mTaliy  a  financial  center 
such  as  London  or  New  York)  for  a  specified  amount  repre- 
senting the  cost  price  of  certain  goods  ordered  by  the  bank's 
customer,  on  whose  behalf  the  credit  is  issued.  The  letter 
designates  a  time-limit  ami  specifies  that  all  <lrafts  shall  \>e 
accompanied  by  the  relative  invoice,  bill  of  lading,  insurance 
policy,  consular  certificate,  etc. 

Before  issuing  a  commercial  letter  of  credit  the 
bank  requires  the  customer  to  sifpn  an  application 
form  (Fig.  14  on  page  lO.'J)  setting  forth  the  par- 
ticulars and  terms  of  the  shipment  and  giving  instruc- 
tion in  regard  to  terms,  insurance,  etc.,  all  of  which 
are  embodied  in  the  letter  of  credit,  which  is  issued  by 
the  bank  in  four  parts,  namely,  one  original  and  three 
copies  (these  copies  however  vary  but  slightly  from 
the  original). 

1.  The  original  is  addressed  to  the  foreign  merchants  in 
whose  favor  the  credit  is  issued  (Fig.  1.5).  This  is  handed 
to  the  customer,  who  forwards  it  to  his  correspondent. 

2.  A  copy  is  addressed  to  the  London  or  New  York  bank 
on  which  the  credit  is  issued,  authorizing  it  to  protect  the 
drafts  against  the  credit  when  drawn  in  accordance  with 
the  terms  and  conditions  thereof. 

.'i.  A  copy  of  the  original  is  delivered  to  the  customer  for 
his  files. 

4.  A  copy  is  retained  by  the  bank  issuing  the  credit. 

On  the  reverse  side  of  the  last  two  copies  is  a  receipt, 
signed  by  the  customer,  incorporating  an  agreement 
regarding  the  basis  on  which  the  bank  is  to  be  re- 
iinlmrLed,  and  the  amount  of  its  commission  (which 
varies  according  to  the  currency  of  the  bill  drawn). 


108 


DOMESTIC  AND  FORKICJN  KXgHANGE 


The  bank's  rijyhts  in  case  of  .lefnult  in  payment  or 
other  difficulties  is  also  defined  (Ki^.  IB). 

Commercial  letters  of  credit  are  invalunl)le  factors, 
and  in  the  promotion  of  internutional  trade  and  com- 
merce greatly  facilitate  the  negotiation  of  bills  of  ex- 
change, not  only  in  the  import  business  of  a  coimtry 
but  also  in  the  e.ximrt  business.  Letters  of  credit,  tho 
not  themselves  negotiable,  ren<ler  valuable  service  to 
commerce  by  facilitating  the  drawing  and  negotiation 
of  bills  of  exchange  thruout  the  world.  These  two 
phases  are  dealt  with  fully  in  later  chapters. 

RF.VFEW 

Whnt  nre  the  two  classes  of  bills  of  exchange  ami  wlint  does 
eaeli  include? 

Hi.w  does  a  cable  transfer  differ  from  a  clieck?  Wliv  are 
hiRlier  rates  of  exclianffe  eliarRcd  for  it  tlian  for  a  cheek  >  What 
are  the  main  f.ietors  which  determine  the  difference  in  exeha.nce 
rates  between  cable  transfers  and  demand  drafts? 

What  conditions  will  tend  to  produce  .  br  ,  -iial  enl)!:-  rates' 
Discuss. 

What  are:  (a)  commercial  lonpr  bills;  (b)  documentary  bills  of 
exchange;  (c)  clean  bills  of  exchange?  Give  an  illustration  of  a 
clean  bill  and  of  a  documentary  bill. 

Describe  the  kind  of  bills  of  exchange  which  are  considered 
safe  to  buy  and  those  which  involve  risk.  What  are  the  primary 
conditions  which  make  the  purchase  of  a  bill  of  exchange  desira- 


CHAPTER  VII 

A  DAY  IN  AN  EXCHANGF.  BOX 

1.  Practical  cjrcIiangc.—A  very  practical  way  to 
obtain  an  insight  into  foreign  exchange  is  to  study 
actual  counter  operations. 

We  have  already  seen  how  the  rates  are  obtained 
from  New  York.  Therefore,  in  our  operations,  we 
shall  use  the  quotations  given  and  consider  theiu  as 
the  cost  price  to  us  of  the  various  exchanges. 


BulleUo! 

London 

Cable    4.9o74 

Drniand    4,8S« 

(IO-<Jiiys      4.8J00 

(.'uluiiu-rciul  Bankers   .  ,  .  4.Hi>'i5 

I'nrii 

y.\'"'<^^    i«0%-H2 

ini-iks    IS.iOcU. 

"orlin 'J*'h« 

Hong  Kong M> 


Buying: 


4.810 


fleUlna 


4.BT9I 
4.8T 


B.\9% 
lB.%)ctl. 
9474 
40.« 


In  the  examples  which  follow,  the  allowance  made 
for  profit  is  nominal  and  the  explanations  necessarily 
brief;  hence  reference  should  be  made  to  the  more  de- 
tailed information  given  in  later  chapters. 

In  practice,  the  conversions  are,  of  course,  arrived 
at  by  the  use  of  exchange  tables,  but  the  act  ^  i .  work- 


109 


.    n 


110      DOMESTIC  AND  FOREIGN  EXCHANGE 

ing  of  conversion  will  be  shown  'n  the  examples  here 
given. 

2.  Demand  sterling  soW.— Our  first  customer  is 
Mr.  Bryant,  who  wants  to  send  £420  to  London 
We  quote  him  4.87  and  ask  him  to  fill  up  and  sign  a 
requisition  form.  This  form  should  he  used  in  con- 
nection with  the  sale  of  every  kind  of  draft,  foreign 
or  domestic,  as  it  eliminates  the  risk  of  misspelling 
names  and  of  making  other  similar  errors. 

In  filling  out  a  sterling  draft,  great  care  should 
be  taken  to  avoid  wide  spacing.  The  figures  should 
be  made  very  clear.  The  amount,  conmiencing  at 
the  extreme  left,  should  be  written  on  a  single  line  if 
possible.  Shillings  and  pence,  if  there  are  any, 
should  be  written  in  full.  Fractions  of  a  penny 
should  not  be  used.  In  England,  checks  are  com- 
monly written  with  the  shilling  sign  (/) ;  thus  7/2 
means  seven  shillings  and  two  pence,  but  the  former 
method  is  safer. 

By  the  exchange  tables  we  find  that  Mr.  Bryant 
must  give  us  a  check  for  $2,045.40. 

Conversion :     420  x  4.87  =  2,04.5.40. 

Mr.  ]\Ieyers,  a  lawj'er,  now  makes  a  requisition  for 
the  equivalent  of  $1,000,  the  amount  of  a  legacy  he  has 
to  remit  to  England,  for  which  we  give  him  a  draft  for 
£205-9-7,  at  $4.86%. 


Conversion:  i^  =  205.48  or  in  money  £205.9s7d. 


A  DAY  IN  AN  EXCHANGE  UOX  m 

Mr.  IMeyers  has  also  to  cable  £l,000  to  one  of  his 
clients  in  London,  for  which  we  require  explicit  in- 
structions on  the  requisition  regarding  the  name  and 
address  of  the  payee,  and  similar  items.  We  charge 
at  the  ';>u.  vii'  *4.872.5  per  pound  sterling  and,  in  addi- 
tion, t)ie  'Mst  of  '(ie  cable  message,  $2.00;  the  total  is 
$4,874..>i,  C'arf  should  be  taken  in  coding  the  cable 
which  should  be  checked  by  another  officer. 

The  message,  in  plain  English,  not  in  code,  should 
be  forwarded  to  the  London  correspondent. 

3.  Sterling  purchased.— "Slr^.  Ellen  Smith  brings 
in  a  crossed  check  ■  for  £180,  which  we  place  to  her 
credit  at  4.82%  realizing  $868..50.  The  check  is  pay- 
able  to  the  order  of  iMrs.  John  Smith,  and  as  the  Eng- 
hsh  banks  are  very  particular  about  the  indorsement's 
being  exactly  the  same  as  that  on  the  face  of  the  check, 
we  ask  lAIrs.  Smith  to  sign  it  "Ellen  Smith,  wife  of 
John  Smith."  If  it  is  payable  to  Airs.  Ellen  Smith  it 
should  be  indorsed  "Ellen  Smith,"  the  "Mrs."  being 
disregarded.     Indorsements    on    foreign    checks    or 

1  A  check  is  crossed  hy  drawing  t«o  parallel  transverse  lines  across 
its  face.  w,lh  or  without  the  words  "and  Co."  This  constitutes  a  ••(,'«  "a 
crossmg  and  the  bank  on  whom  it  is  drawn  must  pay  it  onirthru 
another  bank,  or  receive  it  on  deposit  direct  from  the  payee  If  the 
name  of  a  particular  bank  is  written  between  the  lines;  t'he  check  is 
crossed  specmliy  and  can  only  be  paid  thru  and  to  that  bank  If  the 
holder  of  a  crossed  check  is  a  customer  of  the  drawee  l,ank.  the  latter 
need  not  pay  cash,  but  may  credit  the  customer's  account,  and  the  cus- 
tomer can  withdraw  the  amoun,  bv  check  if  he  so  desires 

The  crossed  check  is  not  used  in  Cana.Ia  or  the  United  States,  tl,o  it 
IS  authorised  „  Canada  by  the  Bills  of  Exchange  Act  (Sec,   IfiS-  75 
In  Englan.l    liowever.  where  identification  is  not  so  stridlv  enforced  by 

lo^iirw^g  ur "'  ""^^'"'^  ^'■-'''  '^ '"  ---"*  '-^'^  ^^'"«  p"'- 

XVJI— 9 


I .'    la 


118      DOIESTIC  AXD  FOREIGN  EXCHANGE 

drafts   should   always   be   written,    never   stamped. 

Sangster  and  Company,  produce  dealers,  offer  a  60 
days  sight  draft,  with  documents  attached,  for 
£2,000  against  a  shipment  of  cheese  to  be  surrendered 
on  payment  (D/P).  We  place  the  sum  of  £i,000 
to  their  credit,  after  seeing  that  all  the  papers  are  in 
order  and  properly  indorsed.  Since  the  rate  given 
is  $4.81,  they  realize  $9,620. 

Attached  to  the  draft,  which  is  made  out  in  dupli- 
cate, are: — 

Alarine  bill  of  lading  (in  duplicate). 
Certificate  of  insurance  for  £2,150. 
Letter  of  hypothecation.^ 

Before  mailing,  we  indorse  by  written  signature  all 
documents  to  tlie  order  of  our  London  corres])ond- 
ent.  The  duplicate  draft  and  bill  of  lading  are  sent 
by  the  next  mail. 
^  4.  Fremh  exchange.— Tht  first  customer  for 
French  exchange  wants  a  draft  for  fcs.  300.2.).  We 
sell  to  him  at  .1930  and  receive  $57.9,5.  (These  rates 
advance  by  hundredths  of  a  cent.) 

We  are  careful  to  write  out  the  date  in  words,  for 

J  A  letter  of  hj-polheeatlon  is  a  certificate  attached  to  a  ilocunicntary 
bill  ot  cxcli,inge  aiKl  signed  by  the  <lrawer.  It  describes  the  nature  of 
he  shipmeni,  etc.,  and  states  in  effect  (1)  that  tlie  bill  „f  la.ling  is 
lodged  as  collateral  security  for  the  acceptance  and  ..nvincnt  of  the 
draft,  (i)  that  in  case  of  dishonor  the  holder  is  authorized  to  dispose 
of  the  goods  and  apply  the  proceeds  toward  payment  of  the  draft  and 
the  expenses  incurred,  (3)  that  the  drawer  holds  himself  liable  for  any 
deficiency,  and  agrees  to  pay  same  on  demand.  When  an  ex.iortcr  sells 
a  number  of  bills  of  exchange  to  a  bank,  a  general,  or  blanket,  hvpothe- 
cation  certificate  is  given  to  apply  to  any  and  all  bills  of  exchange  pur- 
chased from  him.  ' 


A  DAY  IN  AN   EXCHANGi:  BOX  li;J 

otherwise  a  check  would  be  treated  as  a  bill  and  taxed 
i!  fcordingly. 

The  body  is  filled  in  as  in  dollar  checks,  and  the 
memorandum  reads  fcs.  300.2.3. 

The  next  requisition  is  for  a  draft  on  l^iris  ff)r 
fcs.  .5,000  at  3.19%.  When  francs  are  quoted  this 
way,  so  many  francs  for  one  dollar,  we  decrease  the 
rate  in  selling;  in  otiier  words,  we  buy  higli  and  sell 
low.  Paris  funds  cost  us  .5.20  ^-'k:^  or  900.08  for 
fcs.  .5,000;  if  we  sell  at  .5.19-)h  we  shall  receive  $9(!2.69, 
making  a  profit  of  $2.61. 

If  we  quoted  5.20  we  should  receive  $961  .53  a 
profit  of  $2.0.5. 

Conversion   ~^L  =^$962.69. 

A  decrease  in  the  rate  'i  centimes  corresponds  to 
a  profit  of  Vs  of  one  per  cent  on  the  dollar  amount. 

■5.  German  ex-change— ^Ir.  Jenkins  wants  to  send 
1,000  marks  to  his  daughter  in  Heriin.  for  wliich  we 
charge  him  $237.19,  at  the  rate  of  9-t'fs  cents  per  4 
marks. 

Conversion:  :^=. 2371 87.5  the  value  of  one 
mark  in  cents,  or  $237.19  for  1,000  marks.  Tlie 
draft  should  be  filled  out  in  marks,  and  odd  pfennigs 
should  be  avoided.  See  that  tiie  draft  reads  pav  "out 
of  money  at  our  credit"  or  "out  of  balance,"  or  that 
there  are  words  to  that  effect,  since  otherwise  it  will 
be  subject,  as  are  bills  of  exchange,  to  stamp  taxes 
of  /i>o  of  one  per  cent. 

German  exchange  is  also  quoted  at  so  many  cents 


114      DOMESTIC  AND  FOREIGN  EXCHANGE 

ta  the  mark,  advancing  by  steps  of  .01  cent,  24.01, 
24.02,  etc.,  and  a  fluctuation  of  .01  cent  means  about 
42  cents  on  $1,000.  The  conversion  requires  no  ex- 
planation. An  advance  of  %  cent  per  4  marks  cor- 
responds roughly  to  '/8  of  one  per  cent  on  the  dollar 
amounts. 

0.  Sundry  drafts.— Won  Lung,  who,  by  the  way,  is 
a  very  close  figurer  on  exchange  rates,  wants  a  draft 
on  Hongkong  for  $100  local  currency,  for  which  we 
quote  him  $49.20  for  each  Mexican  or,  as  it  is  called 
local-currency  dollar.  His  draft,  therefore,  costs 
him  $49.20.  In  making  out  the  draft  on  Hongkong, 
"One  hundred  dollars  Local  Currency"  (the  use  of 
"cents"  should  be  avoided  if  possible)  should  be  writ- 
ten in  the  body  of  the  draft.  Drafts  on  Hongkong 
are  generally  made  out  to  bearer;  so  that  the  remitter 
runs  considerable  risk  in  using  them. 

If  Won  Lung  had  asked  for  the  equivalent  of  $100 
m  local  currency  he  would  have  received  a  draft  for 
Loc.  Cur.  $203.2.)  or  -^ 

.4'J.'() 

Belgium,  Switzerland  and  Italy  are  members  of 
the  Latin  Union,  and  their  monetary  system  and  quo- 
tations are  similar  to  that  of  France,  with  the  ex- 
ception that  the  franc  is  called  the  lira  (plural  lire) 
in  Italy.  There  is  very  little  demand  for  drafts 
on  other  countries  of  Europe,  and  such  demand  is 
only  for  small  amounts  for  individual  use.  Large 
transactions  are  settled  by  means  of  drafts  on  the  big 
centers— London.  Paris  and  Berlin— and  exchange 


A  DAY  I\  AX  EXCHANGE  BOX 


n.- 


on  these  points  ^rtnerally  commands  a  premium  in 
other  Euroj)ean  cities. 

7.  Travelers'  cheehn.— The  next  customer  is  Mr. 
Brown,  who  intends  to  visit  Eurojje  and  who  asks  us 
to  arrange  his  finances  for  the  trip.  He  requires  a 
letter  of  credit  for  £1,000,  travelers'  checks  for  .%500 
and  £10  in  sovereigns. 

Travelers'  checks,  altlio  sold  and  payable  in  dol- 
lars (in  denominations  of  $100,  $30,  $20  and  $10) 
are  also  payable  in  the  principal  foreign  countries  for 
the  full  fixed  amounts  in  foreign  currencies  printed  on 
the  face  of  the  cheeks;  there  is  no  deduction  for  com- 
mission. In  those  colonies  which  use  the  same  cur- 
rency as  their  mother  countries,  the  ciiecks  are  payable 
at  the  current  rate  for  purchasing  exciiange  on  the 
capitals  of  the  respective  mother  countries. 

Travelers'  cheeks  may  be  cashed  practically  any- 
where. They  are  self-identifying  and  easily  nego- 
tiated. ]\Ir.  Brown  pays  $.502.50  (  Vj  of  one  per  cent 
commission)  and  receives: 

1.  A  book  of  checks  of  the  denominations  he  r<.'qiiires. 

2.  A  list  of  correspondents,  hotels,  etc.,  that  will  cash  the 
checks. 

3.  A  letter  of  identification,  whicli  he  signs  in  our  pres- 
ence and  which  is  used  by  the  correspondents  for  comparison 
with  the  signatures  on  the  checks  when  he  obtains  the  cash. 
This  letter  also  contains  the  numbers  and  amounts  of  the 
checks. 

Some  banks  do  not  use  a  letter  of  identification, 
but  require  a  signature  of  the  customer  to  be  placed 
on  each  check  before  issue.     Thus  every  clieck  carries 


116      DOMESTIC  AND  FOREIGN  EXCHANGE 

its  own  identification  but  the  risk  is  greater  tlian  when 
the  letter  is  used. 

8   Issue  of  a  letter  of  credit.— \Ve  now  come  to  the 
cii-cular  letter  of  credit  and  give  Mr.  Brown: 

1.  The  letter  itself  for  £1.000. 

2.  A  letter  of  indication  bearing  his  signature. 

3.  A  list  of  correspondents   from   whom   nioncv  may   be 

Mr.  Brown  signs  an  agreement  that  any  check 
drawn  by  him  against  the  credit  siiall  be  charged  to 
his  account  at  the  current  rate  of  exchange  of  the  day 
when  presented  to  us  for  redemption,  plus  a  commis- 
sion of  one  per  cent.  If  the  customer  is  of  high  linan- 
cial  standing  this  agreement  will  be  sufficient,  since 
there  will  always  be  funds  in  his  account  with  which 
to  meet  the  withdrawals ;  if  he  is  not  of  high  standing, 
financially,  cash  or  securities  to  the  amount  of  the  lia- 
bility must  be  deposited. 

9.  Paifment  on  letter  of  credit.—Our  next  visitor 
is  Mr.  Jackson,  from  London,  England,  bearing  a 
letter  of  credit  from  one  of  our  correspondents.  He 
presents  his  letter  for  £500  and  a  letter  of  indication, 
with  a  request  for  i!lO.  We  see  that  the  letter  is  in 
form  in  regard  to  dates,  etc.,  compare  it  witli  the 
sample  form  and  signatures  of  our  correspondent  on 
file,  and  add  up  the  indorsements  to  see  that  there  is 
a  sufficient  balance  to  meet  the  proposed  withdrawal 
Eveiything  being  in  order  we — 

1.  Carefully  indorse  on  the  back  of  the  letter  the  date 
and  amount  withdrawn  and  sign  our  own  name. 


A  DAY  IN  AX  EXCHANGE  BOX  117 

2.  We  fill  in  a  sterling  draft,  which  Mr.  Jackson  signs, 
for  the  amount,  in  strict  accordance  with  the  instructions 
contained  in  the  body  of  the  letter  of  credit. 

3.  We  then  pay  Mr.  Jackson  the  equivalent  of  £10  at  the 
rate  of  the  day,  say  $48.20. 

Letters  of  credit  are  sometimes  fraudulent  and 
great  care  should  be  taken  in  comparing  them  v.itli 
the  original  copy  and  signatures.  In  the  hands  of 
private  individuals  they  are  intended  only  to  pro- 
vide funds  for  use  in  traveling  from  place  to  jjlace, 
and  any  withdrawal  of  an  unusual  proportion  of  the 
face  amount  should  be  viewed  with  suspicion,  unless 
some  satisfactory  explanation,  such  as  the  purchase 
of  tickets  for  the  homeward  journey,  can  be  given. 
The  letter-of -credit  form  should  be  attached  to  the 
final  draft  when  the  withdrawal  exhausts  the  credit. 

Our  customer,  ^Mr.  Brown,  in  using  his  letter  of 
credit  in  foreign  ccimtries,  will  be  treated  as  Jlr. 
Jackson  was. 

10.  Payment  of  a  travelers'  check.— We  next  have 
presented  to  us  a  travelers'  cheek  for  $100.  We  ask 
for  the  letter  of  indication  and  request  that  the  check 
be  signed  in  our  presence  by  the  holder.  After  com- 
parison of  the  signature  and  number  of  the  check  with 
the  letter  of  indication  we  pay  the  exact  amount  of 
the  check,  $100.  By  arrangement  with  the  issuing 
bank,  for  our  trouble,  we  are  entitled  to  10  cents, 
which  we  add  to  the  check.  We  then  forward  the 
item  for  redemption  as  $100.10. 

11.  Commercial   letters    of   credit. —Rogers    and 


118      DOMESTIC  AND  FOREIGN  EXCtlANGE 

Barclay,  tea  merchants,  next  apply  for  a  commercial 
letter  of  credit  on  London  for  £10,000  in  favor  of 
Williamson  Brothers,  Colombo,  Ceylon,  tea  mer- 
chants. The  first  thing  to  determine  is  Rogers  aiid 
Barclay's  financial  standing  and  business  experience. 
It  is  true  that  any  transactions  against  letters  of  credit 
are  protected  by  bills  of  lading  and  insurance,  but 
it  must  be  remembered  that  there  are  many  risivs  in 
the  import  business,  especially  when  the  distance  in- 
volved is  great,  in  the  way  of  shrinkage  in  market 
value,  loss  in  weight  and  depreciation. 

If  the  financial  standing  of  Rogers  and  Barclay  is 
satisfactory  we  ask  them  to  sign  an  application  for  a 
commercial  letter  of  credit  setting  forth  the  particu- 
lars and  terms  of  the  shipment  and  giving  instruc- 
tions in  regard  to  insurance,  etc.,  all  of  which  are  em- 
bodied in  the  letter  of  credit  addressed  to  Williamson 
Brothers.  This  letter,  with  instructions,  is  handed  to 
Rogers  and  Barclay  to  be  forwarded,  and  they  in  re- 
turn give  us  a  receipt  in  which  is  incorporated  an 
agreement  regarding  the  basis  on  wliich  the  bank  is  to 
be  reimbursed,  tlie  amount  of  its  commission  (which 
varies  according  to  the  currency  of  the  bills  drawn) 
and  a  statement  of  the  bank's  rights  in  case  of  default 
in  payment  or  other  difficulties. 

The  letter  of  advice  is  forwarded  to  our  London 
correspondents,  and  a  copy  is  retained  for  our  files. 
It  does  not  necessarily  follow  that  all  the  money  repre- 
sented by  the  letter  of  credit  will  be  used  at  one  time. 
There  may  be  one  shipment  or  more,  but  no  matter 


A  DAY  IN  AN  EXCHANGE  BOX  119 

how  many  there  are  they  must  all  be  made  within  the 
time  limit  mentioned  in  the  letter. 

REVIEW 

If  you  were  asked  to  make  out  a  draft  on  London,  enumerate 
tlie  various  steps  you  would  take  in  so  doinf;. 

In  selling  French  exchange  explain  the  various  operations  re- 
quired. 

How  would  you  make  out  a  draft  on  Berlin  ? 

What  .'ire  the  advantages  of  travelers'  checks.' 

What  instruments  are  issued  with  a  circular  letter  of  credit.' 
How  would  yoi:  proceed  in  paying  one.' 

If  n  business  house  applied  to  you  for  a  commercial  letter  of 
credit,  what  steps  would  you  take  before  issuing  it.' 


n 

'4 

i  '11 


CHAPTER  VIII 

FOREIGN  EXCHANGi;  AND  EXPORTS 

1.  Interdependence  of  exports  and  imports  ~l{ 
merchandise  were  the  only  basis  of  international  in- 
debtedness the  value  of  the  exports  would  have  to  be 
equal  to  that  of  the  imports  or  else  trade  would  i)rac- 
tically  cease.     Suppose  a  country  which  does  not  it- 
self produce  Kold.  has  an  excess  of  imports,  for  which 
It  coul.l  pay  only  by  shipping  gold.     To  a  limited  ex- 
tent this  could  be  done   but  its  supply  of  g„Id  would 
soon  be  <  .hausted  and  the  only  way  to  replenish  it 
would  be  to  reduce  the  amount  of  imports  below  that 
of  Its  exports.     Furthermore,  the  loss  of  gold  from  a 
country  mduces  a  fall  in  the  price  of  goods  and  a  rise 
m  the  price  of  money,  and.  owing  to  the  depletion  of 
the    bank   reserves,   a   rise   in    interest   follows      It 
would,  therefore,  become  a  good  country  to  buy  fron. 
and  a  poor  country  to  sell  to.     Automatically.  ;xports 
would  be  stmiulated  and  imports  checked  "until  the 
balance  was  reversed.     In  practice,  however,  the  ex- 
ports of  a  country  are  not  confined  to  merchandise 
but  mclude  other  elements  known  as  "invisible  ex- 
ports "    which    offset   the    imports    of   merchandise. 
\  isible  exports"  consist  of  merchandise  of  every 
description,  including  gold:  they  are  so  called  because 
accurate  records  of  all  goods  and  specie  entering  or 


120 


FOKEKiN  EXCHANGE  AM)  EXPORTS       181 

leaving  a  country  are  kept  by  the  customs  and  port 
autliorities.  Every  vessel  clearing?  from  a  port  must 
declare  its  cargo  before  leaving,  and  all  goods  enter- 
ing the  country  are  exaniine<l  and  valued  at  the 
custom  house.  This  system  affords  a  fairly  accurate 
record  of  the  visible  exports  and  imjiorts  of  a  coun- 
try. A  country's  "invisible"  foreign  trade  is  so  called 
liecause  no  such  rccoru  is  available  owing  to  its  nature. 
It  consists  of  the  import  and  exjjort  of  services,  of 
luwids,  shares  and  other  evidences  of  indebtedness  and, 
not  being  the  subject  of  government  supervision,  there 
is  no  certain  method  of  ascertaining  the  amount  and 
volume  of  these  transactions.  For  that  reason  they 
can  only  be  roughly  estimated. 

The  disparity  between  the  visible  exports  and  the 
visible  imports  of  the  principal  countries  of  the  world 
for  the  year  ending  December  31,  1913,  which  repre- 
sents normal  trade  conditions,  will  demonstrate  the 
importance  played  by  the  invisible  exports  and  the  in- 
visible imports  in  adjusting  the  balances  of  payments 
among  the  countries  of  the  world. 

Imports  Exports 
(I.asl  six  ciphers  omitted) 

Groat  Britain $3,080  $2,.371 

Giimaiiy 2,54,5  2,132 

United  States 1,717  2,311 

Franre    1,589  i]'g9(; 

■Austria 726  591 

^"an»da fi7()  3-,^ 

Kussia     fi03  789 

Denmark 215  i^g 

Sweden   185  177 


.fc   •  M 


122      DOMESTIC  AND  J-'OIIEIGN  EXCHANGE 


NcthrrlamJs 
Norwiiv    .  ,  . 


Imports  Exports 

( l.iist  Kix  riphrrs  o-iiittt'cl ) 

1-*^  188 

HI  87 


It  Will   l,c  noted  that   tiR.   imports   of  the   above 
miiitnes.  with  the  exeeptio,,  ol'  tho.e  of  the  Ut.ite.l 
Mates.  U.issia  and  the  Xetherlands.  exceed  the  ->  is- 
d.le    exports;  the  difference  is  adjusted  hv  "invisihle- 
exports      S.ieh  excess  of  visible   imports  does   not 
necessardy  place  a  country  at  a  disadvantage,  for  in 
the  case  of  the  older  countries  ^oods  are  imported  in 
payment  of  services  (such  as  freight  and  insurance) 
or  for  mterest  on  forei^m  investments.     In  the  case 
of  a  young  country  like  Cana<la.  however,  the  excess 
of  imports  consists  of  jroods  purchased  with  money 
borrowed  abroad  for  capital  expenditure,  such  as  ma- 
terial for  railways,  factories  and  public  works. 

2.  Ongin  and  .supph,  of  foreign  cxchangc.-Wtha 
the  export  and  import  of  merchandise  are  the  basic 
factors  of  international  indebtedness,  there  are  other 
elements  to  be  taken  into  consideration  which  have 
precisely  similar  effect  on  the  balances  of  indebted- 
ness, and  which  can  therefore  be  expressed  in  terms  t.f 
exports  and  imports.  Briefly  speaking,  trade  be- 
tween two  countries  consists  of  mutual  exchanges  of: 

1.  Merchandise 

2.  Gold 

3.  Services 

4.  Evidences  of  indebtedness. 

For  the  sake  of  simplicity  we  generally  consider  that 
one  country,  say,  the  United  States,  trades  with  an- 
other country,  England,  just  as  if  a  statement  of  ac- 


FOHKIG.N  i:XCHAX(;i;  AND  KXPORTS 
count  were  made  ciit  daily  and  the  relati 


is:j 


l)alance 

arriveu  ai  ami  settled.     Such,  oC  curse,  is  tu.t  the 
ease;  the  transactions  occur  ainouK  "  nuiltitude  of 
independent  merchants  and  hankers,  whose  hills  of 
exchange  on  one  another  furnish  the  supply  of   and 
govern  the  .lemau.l  for,  foreign  exchange,  *and  thus 
affect  the  price  ..f  exchange  l)etwecn  the  two  coun- 
tries in  (|iiestion.     Hankers  and  exchange  hrokers  in 
New  York  and  London  encourage  the  puhlic  to  util- 
ize their  services  for  paying  dehts  ahroad,  and  in 
Older  that  they  may  do  this,  also  encourage  those 
who  have  claims  against  persons  ahroad  to  sell  these 
claims  to  the  hanks  in  the  form  of  hills  of  exchange 
thus  enabling  the  hanks  to  offset  sales  against  pur- 
chases.    In  other  words,  the  hanks  are  both  l)uyers 
and  sellers  of  foreign  exchange.    A  continuous  process 
of  assembling  and  distributing  exchange  is  thus  ef- 
fected thru  the  agencies  of  banks,  which  act  as  clear- 
ing houses,  and  eventually  make  a  settlement  between 
e  financial  centers  of  the  two  countries.  Should  \ew 
.  ')rk  banks,  for  instance,  be  called  upon  for  more  ex- 
change on  London  than  they  are  able  to  buy.  they 
must  provide  funds  to  meet  their  withdrawals"  by  ex- 
porting gold  or  by  some  other  means.     As  a  rule," gold 
shipments  are  avoided  as  much  as  possible  and  the 
required  balance  in  London  is  often  created  by: 

1.  Buying  exchange  on  other  centers  and  sending  to  Lon- 
don for  credit. 

2.  Shipping  securities  to  London  to  be  sol.l  or  borrowed 
against. 

3.  L'sing  finance  bills. 


124      DOMESTIC  AXD  FOREIGN  EXCHANGE 

These  are  the  principal  methods  resorted  to  in  an 
endeuAor  to  adjust  an  excess  of  imports  over  exports; 
if  in  spite  of  these  the  halance  of  payments  remains 
adverse,  gold  is  shipped. 

3.  "The  United  States  in  account  icith  the  tcorhJ." 
—The  exports  of  one  country  foini  the  imports  of  an- 
other, and  a  study  of  the  foreign  trade  of  different 
countries  will  sliow  that  the  component  items  of  the 
exports  and  imi)orts  vary  only  in  degree.  Dean  Jo- 
seph French  Johnson  in  "Money  and  Currency" 
gives  this  statement  of  "The  United  States  in  Ac- 
count with  the  World,"  tiie  headings  of  which  are 
comprehensive  and  self-explanatory  and  call  for  very 
little  comment. 

The  exports  of  merchandise  exceed  the  imports 
for  the  year  under  consideration  ( 1904) ,  as  thev  did  in 
1913,  and  the  difference  was  adjusted  hy  tiie  "invisible 
imi)orts."    The  statement  shows  that  gold  was  both 
exported  and  imported,  indicating  that  in  the  course 
of  the  year  it  was  found  necessary  to  import  gold  to 
correct  a  falling  rate  and  to  export  gold  to  a<ljust  a 
rising  rate.     In  these  days  of  efficiency  tiie  necessity 
of  shipping  gold,  with  the  attendant  risk  and  expense, 
is  a  crude  expedient  and  could  easily  he  obviated  by 
the  use  of  some  form  of  international  gold  certificate. 
Tiie  invisible  exports  and  imports  can  be  consid- 
ered under  broader  classifications  as  net  balances  off- 
setting the  excess  of  visible  exports,  as  shown  in  the 
following  statement: 


FOREIGN  EXCHANGE  AND  EXPORTS       185 


O  O         MJ  ?1 


£  ;  .i    •  5.-=  i-  /;  £  -    ■  3  .  -S  .  g  c  .S-  !».  r  c 

•g  Is^a-S'-n  =5  a.     s  £  t.i  5  i^ 

2  ^  .     iS   .  -^ 

gt  •-  <si     ri  ■»  'o  so     t-"  X  ej  o"  «  *  rj 


M 


126      DOMESTIC  AND  FOREIGN  EXCHANGE 

Exceit  of  visible  exports: 
Mcrcliandisc  ... 

Gold    .  $440,000,000 

30,000,000 

Total  excess  of  exDort^  TTZZ 

E-^cess  of  invisible  impTu:   $476,000,000 

Investments  (3  and  4^ 

Interest  and  profits  (5  and'fii $106,000,000 

Tourists  and  en.ba  sies  r 9  aS ' loi  '  '  '  "  ^^'"OO.OOO 

Ocean  freight  (U)          ^'^  """^  ^») "    •  •  150,000,000 

Special  transactions ' (U) 100,000,000 

Balance  due  b,  foreigi  JnU^T  andsj :  ?SZ 

$+76,000,000 
The  above  statement  shows  that  the  United  st,f„ 
n?  *««f ».»«»  i"  «»ods  to  interest  .„dt,^'^:' 

transactions  at  the  various  financial  centers  ^ 

European  investors  have,  from  time  to 'time   sup- 
plied large  amounts  of  capital  for  the  exploStioZf 
busmess  mdustries  and  utilities  in  the  United  States 
and  the  mterest  on  these  investments  "rseoS 

number  of  Americans  traveling  abroad  calls  for  a 
stea^'  supply  of  exchange  in  the  form  of  letters  o^ 
credit  and  travelers'  checks  and  tho,  for  tl  t Li 
bemg,  the  Mar  has  practically  ended  the  demL 


FOREIGN  EXCHANGE  AND  EXPORTS       127 

for  such  exchange,  it  will  probably  be  greater  than 
ever  after  peace  is  concluded.  Owing  to  the  lack 
of  a  merchant  marine  the  United  States  pavs  a 
hea^y  toll  to  foreign  countries  for  freight,  as  prac- 
tically all  of  her  exports  and  imports  are  carried  in 
foreign  bottoms.  Mention  of  finance  bills  is  omitted 
because,  being  merely  a  temporarj-  expedient  of  sixty 
to  ninety  days  currency,  they  liave  no  place  in  a 
statement  of  this  nature.  They  are  used  principally 
between  seasons  to  anticipate  a  favorable  change  in 
the  exchange  rate  and  are,  as  a  rule,  absorbed  by 
the  balances  created  in  Euro^>e  by  the  fall  shipments 
of  cotton  and  wheat. 

A  study  of  the  following  average  quotations  for 
the  successive  months  of  the  years  1906-10 '  shows 
that  exchange  is  in  favor  of  London  during  the  first 
eight  months  of  the  year  and  in  favor  of  Xew  York 
during  the  last  four  months,  and  for  this  reason  there 
are  practically  few  bills  of  this  nature  outstanding 
at  the  end  of  the  year. 

January ^  gyg 

February 4.87,) 

^^^a'fh   4.'8725 

;;^P"'    4.8715 

*"y 4.875 

J""e 4.876 

July 4.872 

^"g"«* 4.8685 

September   4  ggg 

ti^'n^r^'"'!!'*  by  Mr.  Lawrence  M.  Marks,  and  published  in  "Interna- 
tlonaJ  Trade  and  Exchange"  hy  H.  G,  Brown.  mierna 

XVIT — 10 


138     DOMESTIC  AND  FOREIGN  EXCHANGE 

2"^°^:; 4.8665 

November ^  ggyg 

"''""''^'- 4.869 

4.  Commercial  bilh  of  CTchangc-While.  as  we 
have  seen,  the  movement  of  merchandise  is  not  the  ex- 
clusne  factor  m  the  commercial  relations  of  nations 
which  g,ve  nse  to  transactions  in  foreign  exchange' 

the>   are  the  dommant  element.     The  transactions 
wh,ch  anse  from  them  are  therefore  worthy  of  es- 
pecal  attention.     It  has  already  been  noted  that  in 
the  adjustment  of  commercial  accounts,  bills  of  ex- 
change are  drawn  with  documents  attached.     The 
chief  of  these  documents  is,  of  course,  the  bill  of  la- 
ding, to  ^v^„ch  the  others,  consular,  certificate,  insur- 
ance certificate  and  letter  of  hypothecation  a;e  sub- 
sd.ary      The  nature  of  these  documents  needs  no 
detailed  explanation  here,  as  the  form  and  purpose 
o    most  of  them  have  been  fully  explained  in  the 
Modern  Business  Text  on  "Foreign  Trade  and  Ship- 
ping,   while  the  object  of  the  letter  of  hypothecation 
has  been  referred  to  in  Chapter  VII,  Section  3  note 
Ihe  method  of  using  the  commercial  bill  of  ex- 
change can  be  most  conveniently  explained  bv  means 
of  a  concrete  example.     Suppose  a  cotton  merchant  in 
Aew  Orleans  sells  one  thousand  bales  of  cotton  to  a 
Liverpool   firm  against   draft   with   documents  at- 
tached.    The  merchant  draws  a  sixty-davs  draft  in 
duplicate  for  the  amount  of  the  invoiced  "goods,  say 
ilO,000,  and  takes  it.  with  the  relative  documents 


FOREIGN  EXCHANGE  AND  EXPORTS   m 


attached,  to  his  banker 


in  Xew  Orleans,  who  credits 


him  with  $48,500  at  the  rate  of  the  day  ( $4.8.3 )  The 
merchant  has  sold  his  cotton,  received  his  money  and 
IS  ready  for  a  new  transaction. 

The  Xew  Orleans  bank  sends  the  original  bill  and 
documents  to  its  London  correspondent,  the  dupli- 
cates following  by  the  next  mail.     What  happens  in 
London  to  the  bill  depends  upon  its  nature  and 
whether  the  documents  aie  to  be  surrendered  on  pay- 
ment or  on  acceptance.    ( See  Chapter  VI,  Section  5. ) 
If  he  documents  are  to  be  delivered  on  acceptance,  the 
Ml  becomes  a  "clean"  bill  and  can  be  discounted  in  the 
London  discount  market  and  the  proceeds  placed  to 
the  credit  of  the  Xew  Orleans  bank.     If  the  docu- 
ments are  deliverable  on  payment  only,  acceptance  of 
the  bill  IS  obtained,  but  the  document  remains  attached 
to  the  bill  until  maturity,  unless  the  acceptor  takes  up 
the  draft  under  a  rebate  of  interest  for  the  unexpired 
time. 

In  the  case  of  an  "acceptance"  bill,  the  proceeds  be- 
come available  as  soon  as  the  bill  can  be  accepted  and 
discounted.  In  the  case  of  a  "payment"  bill  the 
American  banker  cannot  count  on  having  the  amount 
available  until  the  maturity  of  the  bill,  tho  prepay- 
ment under  rebate  may  place  the  funds  to  his  credit 
long  before  that  time.  If  the  Xew  Orleans  bank  has 
no  London  correspondent  it  would  sell  the  draft  to 
Its  Xew  York  correspondent,  who  would  remit  it  to 
London  in  due  course.  All  obligants  on  these  bills  re- 
main liable  until  payment. 


130      DOMESTIC  AND  FOREIGN  EXCHANGE 

J.  Financing  exports  by  means  of  dollar  credits.- 
Every  shipment  of  merchandise  to  a  foreign  country 
involves  an  operation  in  foreign  exchange,  but  it  d^es 
not  necessarily  follow  that  the  exporter  must  under- 
stand all  about  foreign  exchange  in  order  to  do  a 
successful  export  business.  Many  goods  are  ex- 
ported against  dollar  credits  opened  with  some  Xew 
York  bank,  and  the  exporter  has  a  simple  dollar  trans- 
action on  his  hands.  Even  when  the  credit  is  opened 
in  London  in  pounds  sterling  the  transaction  offers  no 
very  difficult  problem  in  exchange. 

There  is  always  a  risk  incurred  in  purchasing  docu- 
mentary exchange,  unless  it  is  supported  by  satisfac- 
tory names,  and  is  drawn  against  staple  and  non-per- 
ishable merchandise.     We  shall  consider  a  case  in 
which  an  American  exporter,  say  Mr.  Brown,  of  Bal- 
timore, is  not  satisfied  with  the  standing  of  his  foreign 
customer.    He    is    unwilling    to    risk    a    shipment 
against    unsupported    documents    and    advises    the 
purchaser  to  arrange  a  credit  in  New  York  in  dollars 
for  the  amount  of  the  invoiced  goods,  to  be  paid  on 
delivery  of  the  bill  of  lading  and  relative  documents. 
The  buyer,  say  in  Paris,  goes  to  his  banker,  specifies 
the  amount  and  the  terms  of  the  credit  required,  and 
tlie  banker  writes  or  cables  to  his  New  York  corre- 
spondent to  open  a  credit  for  so  many  dollars  in  fa\  c-r 
of  Brown.     In  this  credit  are  set  forth  the  terms  in 
which  Brown  is  to  be  allowed  to  draw  the  money,  and 
the  various  documents  which  are  to  accompany  the 
drafts.     In  due  course  Brown  is  notified  that  the 


FOREIGN  EXCHANGE  AND  EXPORTS       131 


« 


credit  has  been  opened.  Accordingly,  he  draws  a 
draft  on  New  York  and  deposits  it  in  his  local  bank. 
The  draft  is  paid  within  a  few  days  and,  as  far  as 
Brown  is  concerned,  the  transaction  is  closed. 

The  New  York  bank  having  paid  the  draft  and 
taken  over  the  documents  forwards  them,  debiting  its 
Paris  correspondent  who  opened  the  credit.  If  the 
customer  of  the  Paris  bank  is  of  high  financial  stand- 
ing the  bank  will  probably  turn  over  the  documents 
to  him  at  once,  even  before  full  payment  is  made. 
Otherwise  the  goods  will  be  stored  by  the  bank  on 
their  arrival  and  released  when  payment  is  received. 
This  is  purely  a  matter  of  arrangement  between  the 
Paris  bank  and  its  customer  and  does  not  concern  the 
American  exporter  or  banks.  The  Paris  bank  might 
perhaps  have  been  unable  to  arrange  a  dollar  credit 
on  New  York  and  so  issued  instead,  a  credit  on  I>on- 
don  in  pounds  sterling  against  either  time  or  demand 
drafts  with  documents  attached.  An  explanation  of 
the  procedure  in  this  connection  with  a  history  of  the 
bill,  is  given  in  the  next  chapter. 

6.  Dollar  acceptances.— Until  the  establishment  of 
the  Federal  Reserve  banks,  American  foreign  trade 
had  been  financed  chiefly  thru  the  medium  of  letters 
of  credit  issued  on  London  banks.  The  reason  for 
establishing  a  credit  in  London,  and  thereby  provid- 
ing an  English  acceptance,  was  no  reflection  on  the 
high  standing  of  the  New  York  banks;  it  was  due  to 
provisions  of  the  National  Bank  Act,  which  prohibit 
national  banks  from  doing  an  acceptance  business. 


ISS 


DOMESTIC  AND  FOREIGN  EXCHANGE 


I  urthermore.  the  absence  of  an  open  discount  market 
in  x\ew  York  was  another  serious  obstacle  in  the  free 
movement  of  foreign  credit.  This  inability  to  finance 
foreign  trade,  except  thru  London,  has  proved  a 
serious  handicap  to  the  United  States  in  its  exchange 
relations  with  other  countries.  Spain,  for  instance, 
could  never  settle  in  dollars  for  imports  from  the 
Lnited  States  because  her  imports  from  that  country 
were  paid  for  by  credits  opened  in  London,  and  these 
in  turn  had  to  be  utilized  to  pay  for  credits  opened  in 
-London  m  favor  of  the  United  States 

Mr.  Laurence  ilerton  Jacobs  in  "Bank  Accep- 
tances   '  refers  to  this  feature  as  follows: 

ports  tluu  the  acceptance  of  time  bills,  American  importers 
are,  then,  made  dependent  to  a  lar^e  extent  unon  T  „n^ 

^C^  :,STj.'  r.^z-:f .ri 

pomts  agamst  shipments  of  goods  to  the  United  Statfs 
th  re  are  consequently  in  such  foreign  countries  very  fw 
bills  which  can  be  purchased  for  remittance  to  thrUnited 
S  atcs  in  pav^ent  for  goods  which  have  been  bought  here 
In  other  words,  under  our  present  banking  system  our  irn^ 
ports  do  not  create  a  suppi.v  of  exchang!  o^n  nV  YorT 
for  example,  which  can  be  sold  in  foreign  countries  To  those 
who  have  payments  to  make  in  New  York      Thirml.lfl?  ! 

dependent  upon  London.     It  means  that  when  they  !re  ship- 
•  Publication,  of  the  National  Monetary  Commission.  Document  m. 


FOREIGN  EXCHANGE  AND  EXPORTS       \Aii 


ping  goods  to  South  America  and  to  the  Orient  thev  cannot, 
whtn  tlay  are  subject  to  competition,  advantageously  bill 
them  in  United  States  dollars.  They,  naturally,  do  not  care 
to  value  their  goods  in  local  currency — that  is,  in  the  money 
of  the  country  to  which  the  goods  are  going — so  their  only 
alternative  is  to  value  them  in  francs  or  marks  or  sterling, 
preferably  the  lulter,  owing  to  the  distribution  and  extent 
of  British  trade,  creating  thruout  the  world,  as  it  does  under 
the  English  banking  system,  a  fairly  constant  supply  of 
and  demand  for  exchange  on  London.  When  we  come  to 
bill  our  goods  in  sterling,  however,  it  is  at  once  seen  that 
our  exporters  are  obliged  to  take  a  risk  of  exchange,  which 
is  a  serious  handicap  when  competing  with  British  exporters. 
Our  exporters  who  arc  to  receive  payment  for  their  goods  in 
sterling  must  previously  decide  on  what  rate  of  exchange 
will  make  the  transaction  profitable.  If,  in  an  effort  to  safe- 
guard themselves  against  a  loss  in  exchange,  thev  calculate 
on  too  low  a  rate  for  the  ultimate  conversion  of  their  sterling 
into  dollars,  their  prices  become  unfavorable  compared  to 
those  made  by  British  exporters  and  they  lose  the  business. 
If  they  do  not  calculate  on  a  sufficiently  low  rate  they  get 
the  business  but  lose  money  on  the  transaction  thru  a  loss 
in  exchange. 

Under  the  Federal  Reserve  Act,  however,  national 
banks  are  now  permitted  to  accept  drafts  based  on 
the  importation  or  exportation  of  merchandise  and 
the  Federal  Reserve  banks  stand  prepared  to  dis- 
count satisfactory  paper  created  by  this  class  of  busi- 
ness. Under  these  conditions,  the  Paris  bank,  re- 
ferred to  in  the  preceding  section,  could  have  issued  a 
letter  of  credit  instructing  its  New  York  correspond- 
ent to  accept  Brown's  sixty  or  ninety-day  bill  against 
delivery  of  the  documents,  which  bill  after  acceptance 
could  be  discounted  by  Brown's  bank  or  its  New 


134     DOMESTIC  AND  FOREIGN  EkcHAXGE 

York  correspondent  in  one  of  the  Federal  Reserve 
banks.  In  other  words,  the  procedure  would  have 
been  exactly  the  same  as  in  the  London  case,  except 
that  the  New  York  and  not  the  London  discoujit 
market  would  have  carried  the  bill  until  maturity. 

The  Federal  Reserve  Act  has  provided  the  ma- 
chinery and  it  remains  to  be  seen  whether  the  oppor- 
tunity will  be  freely  availed  of  by  the  international 
financial  world.  It  is  too  soon  to  express  any  defi- 
nite opinion  as  to  the  ultimate  success  New  York  will 
attain  as  an  international  acceptance  market.  Noth- 
ing is  more  sensitive  to  restrictive  conditions  than 
international  credit— it  must  ebb  and  flow  freely  or 
go  elsewhere.  Paternalistic  in  all  things  concerning 
banking  and  finance,  the  United  States  has  already 
surrounded  this  concession  to  modem  requirements 
with  restrictions  and  definitions  that  tend  to  hamper 
that  freedom  of  operation  which  is  so  essential  in  an 
international  money  market. 

7.  E.rport  letters  of  credit.— In  some  countries 
where  banking  facilities  are  undeveloped,  it  may  be 
difficult  for  the  foreign  customer  to  obtain  a  letter 
of  credit  on  New  York  or  London,  or  even  to  make 
a  dollar  remittance.  In  financing  the  exports  to  such 
countries,  a  different  system  is  necessary  in  order  that 
the  Amt..can  exporter  can  obtain  his  money  without 
awaiting  remittance  from  abroad.  This  system  is 
effected  thru  what  are  known  as  "export  letters  of 
credit,"  which  are  issued  by  an  American  banker 
without  the  intervention  of  a'  foreign  bank.     The 


FOKKUJN  KXt  JIANGE  ANU  KXI'OUTS       133 

general  nature  of  letters  of  credit  has  been  explained 
in  the  chapter  on  Bills  of  Exchange.  Their  service 
in  financing  exports  can  be  best  understood  by  a  con- 
crete example.  Williams,  of  Chicago,  sells  a  ship- 
ment of  machinery  to  a  firm  in  Honduras  where  there 
are  no  direct  exchange  facilities  with  \ew  York  and 
it  would  be  very  difficult  for  the  Honduras  mer- 
chant to  purchase  a  draft  on  Xew  York.  Under 
these  circumstances  Williams,  not  wishing  to  wait 
until  a  remittance  is  forthcoming,  goes  to  his  banker 
with  ip'oices,  bills  of  lading  and  other  documents  and 
asks  him  for  an  "export  letter  of  credit."  The  ship- 
ment, we  will  say,  is  worth  $10,000  and  against  this 
the  Chicago  bank  gives  Williams  a  letter  of  credit 
authorizing  him  to  draw  at  ninety  days  against  its 
London  correspondent  for£l,800,  or  about  ninety  per 
cent  of  the  amount  of  the  invoice.  This  draft  on 
London  for  £l,800  Williams  sells  in  the  exchange 
market  in  Xew  York  or  Chicago  (the  letter  of  credit 
being  his  authorization) ;  he  receives  dollars  therefor 
at  the  current  rate  of  exchange  for  ninety-days  bills 
and  obtains  the  bulk  of  his  money.  The  documents 
are  forwarded  by  the  Chicago  bank  to  its  correspond- 
ent in  Honduras  which  collects  the  whole  amount, 
$10,000.  This  is  then  remitted  in  pounds  sterling  to 
London  to  the  credit  of  the  Chicago  banker.  "Before 
the  ninety-days  draft,  originally  drawn,  matures, 
there  will  have  been  received  in  London  more  than 
sufficient  funds  to  retire  it,  and  neither  the  Chicago 
bank  nor  its  London  correspondent  have  had  to  dis- 


m. 


fiJ 


— r»  'fJI 


136     DOMESTIC  AND  FOREIGN  EXCHANGE 

burse  any  money.  The  difference  between  the 
amount  of  the  draft,  £l,800,  and  the  remittance  from 
Honduras,  less  any  charges,  is  paid  to  Williams  by 
the  Chicago  banker  and  the  transaction  is  closed.  As 
an  alternative,  the  Chicago  bank  itself  could  have 
drawn  the  draft  on  its  London  correspondent  for 
£1,800  and  turned  over  to  the  exporter  the  dollar 
proceeds.  By  this  method  a  better  rate  would  l)e 
obtained  for  the  draft  and  the  exporter  is  saved  the 
trouble  of  an  exchange  transaction. 

London  has  direct  relations  with  almost  everv  part 
of  the  world  and  thus  becomes  the  natural  clearing 
house  between  countries  whose  exchange  transactions 
with  each  other  are  limited. 

REVIEW 

What  are  visible  exports;  invisible  exports? 

Of  what  does  trade  between  two  countries  consist?  What  are 
the  principal  methods  used  by  a  country  to  adjust  an  excess  of 
imports  over  exports ?     \\hat  is  done  when  these  methods  fail > 

Oive  an  example  of  the  way  in  which  flie  commercial  bill  of  ex- 
change is  used. 

How  does  an  American  exporter  proceed  when  he  is  unwilling 

wJu  .V    ?'"'"*  "^  S"*"^'  "K"'"'*  unsupported  documents? 

What  disadvantage  has  the  use  of  letters  of  credit  on  London 
caused  the  American  merchaiit  engaged  in  foreign  trnde?  What 
provision  has  been  made  under  the  Federal  Reserve  Act  as  a  rem- 
edy for  this  situation? 


I 


CHAPTER  IX 


iv: 


i 


FOrF.IGX  EXCHANGE  AND  I.\fPORTS 

1.  Commercial  letters  of  credit  and  importing.— 
Altho  merchants  importing  goods  into  a  country  can 
settle  for  them  direct  either  by  remitting  or  by  accept- 
ing a  (Iraft  drawn  by  the  foreign  merchant,  these 
methods  are  now  seldom  followed  except  in  the  case  of 
minor  transactions.  The  employment  of  letters  of 
credit  as  a  medium  of  settlement  for  imported  goods 
offers  greater  advantages  than  any  other  method  of 
pajment,  to  both  the  exporter  and  importer. 

In  America,  import  credits  are  much  more  import- 
ant than  export  credits  and  are  issued  in  much  larger 
volume.  Commercial  letters  of  credit  are  of  ad- 
vantage to  the  importer  of  merchandise  because  they 
enable  him  to  buy  goods  on  a  cash  basis  in  any  part 
of  the  world,  tho  the  actual  payment  is  deferred  sixty 
or  ninety  days,  giving  him  a  chance  to  dispose  of  the 
goods  in  the  meanwhile.  They  insure  for  him  ship- 
ment of  goods  within  a  stipulated  time,  exactly  as 
described  in  the  credit.  He  is  also  able  to  order,  in 
advance,  goods  to  be  manufactured  according  to  his 
specifications  and  requirements  without  prepayment 
of  any  sort,  the  letter  of  credit  being  sufficient  se- 
curity for  the  exporter.  The  majority  of  the  letters 
of  credit  have  hitherto  been  issued  on  London,  but 

137 


138      DOMESTIC  AND  FOREIGN  EXCHANGE 

the  recent  war  and  the  Federal  Reserve  Act  have 
brought  dollar  credits  issued  on  New  York  into  more 
general  use,  especially  for  South  American  business. 
The  acceptance  and  discounting  of  international  bills 
are  such  new  departures  for  the  Xew  York  banks 
that  It  IS  too  early  to  consider  them  as  fully  estab- 
lished conditions.  For  the  purposes  of  illustration 
we  will  therefore  follow  the  history  of  a  credit  es- 
tablished in  London. 

2.  British  acceptances  under  letters  of  credit.— 
The  enormous  credits  accorded  by  London  to  bankers 
and  merchants  thruout  the  world  generally  take  one 
of  two  forms— acceptances  granted  under  letters  of 
credit,  or  finance  bills.  The  following  illustration 
will  show  the  operation  of  an  acceptance  under  a 
letter  of  credit. 

When  a  merchant  in  Holland,  France,  the  United 

States  or  any  other  country  wishes  to  buy  goods  in 

any  other  part  of  the  globe,  he  generally  obtains  a 

credit  thru  a  London  banker  direct  or  thru  a  banker 

in  his  own  country.     In  the  latter  case,  he  instructs 

the  foreign  merchant  from  whom  he  purchases  goods 

to  draw  on  the  London  banker  at  so  many  months, 

sight.     Take  the  case  of  a  tea  merchant  in  Xew  York, 

Mr.  Brown,  who  negotiates  with  Napier  &  Company,' 

tea  growers  in  Ceylon,  for  a  consignment  of  tea. 

Napier  &  Company  probably  know  little  or  nothing 

about  the  financial  standing  of  Brown,  and  even  if  it 

were  excellent,  would  not  be  willing  or  able  to  await 

a  remittance  from  New  York  for  the  shipment.     Na- 


FOREIGN  EXCILAXGE  AND  IMPORTS       139 


pier  therefore  asks  Brown  to  arrange  for  a  credit  on 
London  in  his  favor  for  the  amount  of  the  invoice, 
say  £1,000.     Brown  goes  to  his  baniiers,  the  Banic  of 
New  York,  and  requests  tiiein  to  open  up  a  credit  in 
London   in  favor  of  Napier  &   Company  against 
ninety-days    bills    with    documents    attached.     The 
Bank  of  New  York  instructs  Parr's  Bank,  their  Lon- 
don correspondent,  accordingly,  and  Brown  is  fur- 
nished with  a  letter  of  advice  to  send  to  Napier  & 
Company  staling  that  the  credit  has  been  opened  in 
London  on  the  terms  set  forth.     On  receipt  of  the 
letter,  Napier  &  Company  fill  the  order  and  place 
the  tt.i  on  shipboard,  receiving  a  bill  of  lading  there- 
for.    Napier  tben  draws  a  draft  at  ninety  days,  sight, 
for  £1,000  and  attaching  the  bill  of  lading,  insurance 
policy,  invoice,  etc.,  thereto,  takes  it  to  his  banker, 
the  Bank  of  Madras,  Colombo,  who  purchases  the 
bill  from  him  at  the  current  rate  of  the  day  on  Lon- 
don.    Thus  Napier  &  Company  obtain  their  money 
immediately.     The  Bank  of  Madras  forwards  the 
draft  and  documents  to  its  correspondents  in  Lon- 
flon,  the  Bank  of  Commerce,  who  present  it  to  Parr's 
Bank  without  delay.     The  latter  accept  it,  but  retain 
the  bill  of  lading  and  other  documents.     These  they 
iorward  to  the  Bank  of  New  York,  which  is  thus  en- 
abled to  obtain  possession  of  the  tea  when  it  arrives 
and  either  store  it  for  their  customer  Brown,  on  ac- 
count, or  deliver  it  to  him  on  a  trust  receipt  until  he 
finally  pays  for  it. 
8.  History  of  the  draft  in  London.— To  return  to 


II 


m 


140      DOMESTIC  AXD  FOREIGN  EXCHANGE 


the  draft— this  is  now  an  accepted  b;U  with  first-class 
names  on  it  and  has  an  international  currency.  It  is 
salable  in  any  country  in  the  world,  because  every 
country  finds  it  necessarj-  to  remit  constantly  to  Lon- 
don and  every  foreign  bank  has  a  London  office  or 
correspondent. 

The  bill  can  be  held  until  maturity  and  the  pro- 
ceeds can  then  be  placed  to  the  credit  of  the  Bank 
of  Madras,  but  the  more  usual  course  is  for  the  latter 
bank  to  instruct  its  London  agent,  the  Bank  of  Com- 
merce, to  discount  the  bill  in  the  open  market  and 
place  the  proceeds  to  its  credit,  or  the  bill  may  be 
remitted  by  the  agent  to  another  foreign  center  to 
settle  some  account  there.  In  either  case,  the  bill  re- 
turns to  London  at  its  maturity  and  is  paid  to  the 
holder  on  that  date  by  Parr's  Bank,  tho  in  the  mean- 
time, it  may  have  been  bought  and  sold  several  times 
and  have  passed  thru  half  a  dozen  hands. 

Parr's  Bank  depends  on  the  Bank  of  Xew  York 
to  provide  funds  to  meet  the  bill  at  maturity  and 
would  not  have  issued  the  credit  imless  it  had  had 
confidence  in  the  Bank  of  Xew  York.  The  Bank  of 
New  York  in  its  turn  has  confidence  in  its  customer's 
ability  to  reimburse  it  and  of  course  it  insures  that  he 
provides  the  necessary  funds  for  transmission  to  Lon- 
don in  time  to  discharge  the  obligation. 

4.  Pomtion  of  the  obligants  on  the  bill— To  sum 
up  the  results  of  the  transaction: 

1.  Brown,  the  actual  debtor,  had  the  use  of  £1,000  for 
three  months  and  yet  he  himself  would  probably  have  some 


FOREIGN  EXCHANGE  AND  IMPORTS       141 


difficulty  in  naming  liis  actual  creditor  at  any  particular 
moment. 

2.  Napier  &  Company  in  Colombo  received  their  money 
»s  soon  as  the  tea  was  delivered  on  shipboard,  tho  as  drawers 
)f  the  bill,  tlicy  remain  obligants  until  payment. 

3.  The  Bank  of  Madras  bought  the  bill  from  Napier  & 
Company  and  were  only  out  of  its  money  until  the  bill  had 
reached  London,  was  accepted,  discounted  and  i)laced  to  the 
hank's  credit.  It,  however,  remains  liable  as  indorscr  of 
the  bill  until  its  payment. 

4.  The  Bank  of  Commerce  advanced  no  money.  They 
acted  only  as  agents  of  the  Bank  of  Madras  in  "obtainin(5 
acceptance  of  the  bill,  selling  it  in  tlie  discount  .iiarket 
and  crediting  the  proceeds;  therefore  their  name  does  net 
appear  on  the  bill.  For  their  services  they  receive  a  com- 
mission, 

5.  Parr's  Bank  is  primarily  liable  on  the  bill  as  acceptor 
but  as  the  Bank  of  New  York  must  provide  tlie  funds  for 
paj-ment  it  advances  no  money  on  the  transaction.  It 
merely  makes  a  small  commission  for  the  use  of  its  name. 

The  above  are  all  interested,  directly  or  indirectly 
in  the  bill  but  not  one  of  them,  with  the  exception  of 
the  Bank  of  ^Madras,  has  advanced  a  single  cent.  The 
question  still  remains,  "Who  paid  for  the  tea  during 
the  three  months'  currency  of  the  billf  The  answer 
is  "Those  firms  which  discounted  and  purchased  the 
bill  in  the  open  discount  market  of  London." 

5.  The  part  London  plai/s. — In  much  the  same 
way,  merchants  in  every  country  in  the  world  have 
been  accustomed  to  arrange  credits  in  London  for 
every  other  country  in  the  world  and  for  every  con- 
ceivable class  of  goods.  On  the  outbreak  of  war,  it 
was  estimated  by  Mr.  Lloyd  George  that   British 


i 

m 


I    I 


142      DOMESTIC  AND  FOREIGN  EXCHANGE 

banks  and  accepting  houses  were  liable  for  over 
£350,000,000  of  these  acceptances,  the  greater  part 
of  which  had  been  discounted  on  the  London  market. 
Altho  British  signatures  were  primarily  liable  for  this 
huge  amount,  it  was  not  really  for  their  own  account, 
for  they  looked  to  those  en  whose  behalf  they  had  ac- 
cepted the  bills,  to  provide  the  funds.  The  unprece- 
dented demand  for  sterling  exchange  at  the  begin- 
ning of  the  war  was  due  to  the  attempt  on  the  part  of 
foreign  obligants  to  provide  funds  for  the  maturing 
liabilities  incurred  by  the  British  banks  for  their  ac- 
count, and  under  their  instructions.  Exchange  rates 
on  London  the  world  over  rose  far  above  the  gold 
point.  If  Great  Britain  had  insisted  on  these  debts,  it 
would  have  been  impossible  to  obtain  the  necessary 
sterling  funds  except  at  a  most  ruinous  figure.  Even 
if  the  English  banks  could  have  met  the  acceptances 
as  they  matured  out  of  their  own  funds,  disgrace  if 
not  ruin  would  have  befallen  a  number  of  the  foreign 
banks.  It  was  to  protect  this  vicarious  liability  of  the 
English  banks  that  a  moratorium  was  proclaimed  and 
there  is  no  doubt  that  this  wise  step  saved  the  neutral 
countries,  indebted  to  London,  both  financial  loss  and 
worry.  Mr.  Lloyd  George  in  referring  to  this  class 
of  note  says: 

There  was  that  amount  of  paper  out  with  British  signa- 
tures at  that  time.  Most  of  that  had  been  discounted.  The 
cash  had  been  found  by  British  sources,  and  the  faihirc  was 
not  due  to  the  fact  that  Great  Britain  had  not  paid  her 
creditors  abroad.     It  was  due  entirely  to  the  fact  that  those 


FOREIGN  EXCHANGE  AND  IMPORTS       143 


■cry 


abroad  did  not  pay  Great  Britain.  I  think  that  it  ...  . 
important  from  the  point  of  view  of  British  credit,  to  h„.v: 
that  thoroly  understood,  for  when  the  "moratorium"  came, 
and  there  ai)peared  something  liiie  a  failure  of  British  credit, 
it  was  not  a  British  failure  at  all.  It  was  because  we  could 
not  get  remittances  from  other  countries.  We  had  already 
paid,  but  it  was  vital  to  the  credit  and  good  name  of  this 
country  that  these  bits  of  paper,  which  are  circulated  thru- 
out  the  globe,  with  British  names   upon   them,  with  names 

that  have  been  associated  with  British  trade  and  commerce 

it  was  vital  to  the  good  name  and  credit  of  this  country, 
to  its  continuity  of  trade  and  its  character,  that  they  should 
not  be  dishonored.  What  really  happened  was  that  there 
was  a  complete  cessation  of  credit,  a  breakdown  of  the 
exchanges.  It  was  exactly  as  if  a  shell  had  broken  an  arch 
m  an  aqueduct,  and  there  was  a  cessation  of  the  flow  that 
had  been  going  on  before,  and  what  we  had  to  do  was  tem- 
porarily to  repair  the  arch  so  that  the  flow  should  continue. 

Acceptances  uiwler  "letters  of  credit"  are  not  of 
course  confined  to  London;  they  are  drawn  on  other 
large  financial  centers  such  as  Paris  and  Xew  York, 
but  owing  to  the  special  facilities  afforded  by  London 
the  bulk  of  these  credits  were,  before  the  war,  drawn 
in  sterling. 

REVIEW 

Of  what  advantage  to  the  importer  are  commercial  letters  of 
credit  ? 

Give  an  example  of  how  British  acceptances  under  letters  of 
credit  operate. 

How  did  the  outbreak  of  the  war  affect  London  credits.' 


1 


XVTT— 11 


,  IS 


Mi 


CHAPTER  X 


FINANCE  BILLS 


1.  Definition  of  a  finance  bill. — A  long  bill  of  ex- 
change drawn  by  a  banker  or  financial  bouse  in  one 
country  on  a  banker  in  anotber  against  securities  in 
the  bands  of  the  latter  is  generally  called  a  "finance 
bill."  The  privilege  of  drawing  such  bills  enables 
bankers  to  anticipate  a  change  in  the  rate  of  exchange 
and  also  to  tide  over  a  period  of  high  exchange  which 
otherwise  would  necessitate  a  shipment  of  gold. 
When  properly  used  it  is  an  important  factor  in  in- 
ternational exchange  and  serves  not  only  as  a  cheap 
and  efficient  corrective  to  high  rate,  but  aids  in  the 
development  of  the  production  and  trade  of  the  world 
by  rendering  credit  more  fluid  and  leveling  money 
rates. 

There  is  a  wide  diversity  in  the  definitions  which 
are  given  of  a  finance  bill.  Franklin  Escher  defines 
it  as  "an  unsecured  long  bill  of  exchange  drawn  by  a 
banker  in  one  country  on  a  banker  in  another  coun- 
try and  sold  for  the  purpose  of  raising  money." 
Other  authorities  are  inclined  to  include  all  long  bills 
originating  between  bankers,  whether  secured  or  not. 
The  latter  is  perhaps  the  more  general  understanding 
of  the  term  and  I  would  suggest  the  following  defi- 
nition as  comprehensive: 

144 


FINANCE  BILLS 


145 


A  finance  bill  is  a  long  bill  of  exchange,  secured  or  other- 
wise drawn  by  a  banker  in  one  country  on  a  banker  in 
another,  the  funds  for  the  payment  of  which  at  nmhirity 
must  be  provided  by  the  drawer. 

When  a  Xew  York  banker  has  a  satisfaeton-  draw- 
ing arrangement  with  his  London  correspondents  he 
is  more  or  less  independent  of  market  conditions,  and 
even  if  there  is  a  scarcity  of  commercial  bills  on  the 
market,  he  is  in  a  position  to  create  a  supply  of  bills 
at  a  stated  price.  He  is  reasonably  sure  that  he  will 
be  able  to  buy  exchange  at  a  lower  figure  to  meet  his 
obligations  before  their  maturity,  as  a  high  rate  of 
exchange  brings  out  a  large  supply  of  finance  bills 
resulting  in  a  lowering  of  the  rate.  Mr.  Gec^rge 
Clare  in  his  book  on  "Foreign  Exchange"  says,  "The 
bidding  need  only  be  raised  a  centime  or  two  to  tap 
an  almost  inexhaustible  source  of  supply— that  of 
bankers'  drafts."  In  other  words,  if  the  remitter 
cannot  obtain  a  ready-made  bill,  he  need  only  pay  a 
little  more  and  have  one  made  to  order. 

2.  Finance  bill  for  New  York  account.— The  most 
common  occasion  for  the  use  of  finance  bills  is  to  an- 
ticipate a  fall  in  the  exchange  rates.  For  instance, 
under  normal  conditions,  during  the  summer  months, 
the  rate  of  exchange  for  sterling  is  generally  high 
in  New  York.  It  drops  gradually  until  the  fall, 
when  large  shipments  of  cotton  and  wheat  result  in 
hea\-y  offerings  of  sterling  exchange.  Before  draw- 
ing a  finance  bill,  it  is  necessary  for  the  New  York 
banker  to  make  arrangements  with  the  accepting 


•fe-i 


146      DOMESTIC  AND  FOREIGN  EXCHANGE 


bank  in  London  as  to  the  amount,  terms,  etc.,  of  the 
accommodations.  Such  arrangements  are  general, 
applying  to  a  series  of  transactions,  or  specific,  apply- 
ing to  a  single  transaction  only.  Suppose  the  rate 
at  the  end  of  August  is  4.88  for  demand  bills,  and 
a  banker.  A,  desirous  of  anticipating  the  probable 
drop  in  exchange  in  the  fall,  arranges  with  his  London 
correspondent,  B,  against  securities  deposited  with 
him,  for  a  credit  of  £10,000  by  way  of  a  sixty-days 
draft  on  London.  A  immediately  draws  a  draft  on  B 
at  sixty  days  for  £10,000,  which  he  can  either  (1)  sell 
in  New  York  at  the  sixty-days  rate  for  bills  or  else 
(2)  send  to  London  to  be  discounted  and  placed  to  his 
credit  there,  and  then  sell  his  own  sight  drafts  against 
this  credit.  In  either  case,  he  will  have  the  use  of  the 
proceeds  in  New  York  until  the  maturity  of  the  bill, 
when  he  must  be  prepared  to  place  funds  with  B  to 
meet  it. 

3.  Method  of  using  finance  bills. — It  will  be  noticed 
that  B  does  not  advance  any  money ;  he  simply  lends 
his  name  to  A  and  the  London  discount  market  pro- 
vides the  funds.  The  advantages  and  disadvantages 
of  this  procedure  may  be  summed  up  in  illustrations: 

1.  A  will  sell  his  sixty-days  bill  in  New  York  if  he  can 
obtain  $4.8523  per  pound  sterling  or  better.  This  rate  is 
arrived  at  as  follows: 

Demand  rate  for  Rterlin^r 488. 

»Less,  63  days'  Interest  at  3%  (heing  the  London  mar- 
ket rate  for  prime  bankers'  bills) 2,.537 

•  Prior  to  the  war,  interest  and  stamps  used  to  he  ralriilated  on  the 
basis  of  $48i  to  the  £100,  hut  owinjt  to  llie  wiilt  fluctuation  they  arc  now 
frequently  calculated  on  the  actual  rate  itself. 


[ 


FINANCE  BILLS  1^7 

Stamps  iio  of  1% ^^^        ^..| 

IVr    £100  ^^~ 

orW.8W:tp<.i  pounil  sterling.' *8i.3.'9 

■I  hr  sixty-days  bills  for  i:  10.000  shou  Id  tlierefore  net  him  MSAn  90 

*    343.t9 

'^"ZXL^lwo,Sl^^"l  i!^";""'  ^   P"''"-"^^'   »  demand*"-*'" •" 
draft  for  £10,000  which  he  forwards  to  London  to  provide 
for  the  payment  of  the  hill.     By  this  time  exehai"  i«s 
fallen  as  he  anticipated  and  is  now  at  4.8j,  so  that  he  is 
able  to  buy  the  covering  draft  for '. . . . ... . .'. .''  4^.400  Of. 

^'' Dr.°?!b/v"T„f"l'^'l  7""*^  *",  "^"'"••♦^d   »•»  commission  of  " 

priMiably  1^  of  1%)  is  therefore ^     aflti  39 


There  is,  of  course,  the  risk  that  exchange  might  not 
fall  at  the  end  of  October  as  anticipated,  or  that  the 
interest  rates  in  New  York  might  not  be  maintained 
above  3  per  cent. 

2.  If  A  sent  the  sixty-da.v  bill  to  London  and  immedi- 
ately sold  a  demand  draft  against  the  remittance,  the  trans- 
action would  work  out  as  follows : 

Amount  of  60-days  draft £innoo(*i 

Less  interest  at  3% £., -a,      ^"'•<'<»<W 

Less  stamps,  l^  of  17,, [[[[['.'.'.'.'.      5:00  i6.78 

Net  proceeds  in  London £  9  943  il 

A  would  thus  be  in  a  position  to  sell  his  demand 
draft  for  the  above  amount  and  provide  himself  with 
funds  in  New  York,  £9,948.22  at  $4.88--=$48,522.90, 
the  same  amount  as  realized  in  (1)  by  the  sale  of  the 
sixty-days  bills  itself  in  New  York. 

The  net  proceeds,  £9,943.22,  are  taken  as  the 
amount  of  the  demand  draft  for  illustrative  purposes; 
in  actual  practice  the  draft  would  have  been  drawn  in 


i4 


■ti 


it 


148     DOMESTIC  AND  FOREIGN  EXCHANGE 


The  same  result  would  be 


round  figures,  £10,000. 
obtained,  thus: 

£10.000  demand  draft  rcalUrs  In  New  York StS^SOO  00 

Fr„.ii  which  must  be  drdiicted  the  London  chariKS  for  In- 
terest  and  stamps,  £56.78  at  ^.88 ^77  99 


If,  at  the  maturity  of  a  finance  bill,  it  is  not  con- 
venient to  collect  and  remit  the  relative  loan,  it  is  gen- 
erally possible  to  provide  the  necessary  funds  to  meet 
the  maturing  bill  by  the  sale  of  another  bill. 

4.  Loan  of  a  finance  bill.— The  last  example  shows 
that  the  New  York  banker  assumes  the  risk  of  there 
being  a  rise  in  the  rate  of  exchange  before  the  trans- 
action has  been  completed  and  the  acceptance  in  Lon- 
don retired  by  a  sterling  remittance. 

So  far  as  the  actual  borrower  is  aware,  the  loan  is 
an  ordinary  loan  in  American  currency;  he  has  no 
means  of  knowing  that  there  is  any  question  of  for- 
eign exchange  connected  with  the  transaction.  He  has 
borrowed,  say,  $50,000  at  two  months  at  4  per  cent, 
but  with  his  bank  the  case  is  different.  It  has  loaned 
the  proceeds  of  a  sixty-days  bill  on  London  and  at  its 
maturity  will  have  to  purchase  a  demand  bill  or  cable 
for  £10,000  at  the  current  rate  of  exchange.  The 
price  paid  for  the  bill  will  determine  the  gain  or  loss 
in  the  transaction.  I  f  exchange  rates  have  gone  down 
as  anticipated  a  good  profit  on  the  transaction  may 
be  made,  but  if,  on  the  other  hand,  the  rate  has  risen, 
the  price  which  is  to  be  paid  will  mean  a  loss  in  the 
transaction,  if  it  will  not  wipe  out  all  the  profit. 


FINANCE  BILLS  149 

Bank  A  can  eliminate  this  risk  by  loaning  the  bill 
of  exchange  instead  of  the  dollar  proceeds,  and  charg- 
ing  a  commission  instead  of  a  fixed  rate  of  interest- 
the  borrower  thus  assuming  the  risk  of  a  rise  in  the 
exchange  rate.     The  borrower  in  this  case,  instead  of 
receiving  a  loan  of  $50,000,  would  be  handed  A's 
sixty-days  draft  on  London  for  £10,000.     This   he 
would  immediately  sell  for  dollars,  but  when  the  t'ime 
for  repayment  came,  he  would  have  to  pav  back  not 
dollars  but  a  demand  draft  for  £10,000  which  he 
would  have  to  purchase  at  the  current  rate  of  ex- 
change.    The  banker  makes  a  commission  of  about 
one-half  of  one  per  cent  for  sixty  davs  and  runs  no 
risk  in  the  matter  other  than  the  loaning  risk  to  his 
customer. 

5.  A  finance  bill  on  London  account— Another 
form  of  finance  bill  is  created  when  a  London  banker 
desirous  of  taking  advantage  of  a  high  rate  of  interest 
in  New  ^  ork,  instructs  his  correspondent  to  draw  on 
him  for  £10.000  at  sixty  days  and  lend  the  proceeds 
on  the  \ew  York  market.     This  the  Xew   York 
banker  does  and  sells  the  bill  in  New  York,  investing 
the  money.     Neither  banker  employs  his  own  money 
m  the  operation,  the  money  being  provided  bv  the 
London  market  where  the  bill  is  discounted.     At  the 
maturity  of  the  loan,  the  London  bank  is  j.laced  in 
funds  to  meet  its  acceptance  by  the  New  York  banker, 
or  if  conditions  continue  favorable  the  amount  may 
be  either  renewed  or  reloaned  in  New  York.    A  trans- 
action  of  this  nature  may  be  entirely  on  the  account 


<:  4 


in 


1.50      DOMESTIC  AND  FOREIGN  EXCHANGE 


of  and  at  the  risk  of  the  London  banker,  or  it  mi.    '» 
on  joint  ai>count,  in  which  case  both  the  ri'rlv   wid  tl. 
profit  are  shared. 

6.  Other  u»e»  of  finance  bllla. — Finance  '  lU,  brili 
secured  and  unsecured,  may  be  drawn  reg.iidi'  ^  «i 
the  conditions  of  interest  or  exchange,  purely  'i  r  11  <■ 
sake  of  raising  money.  As  a  rule,  finance  bills  li;r.  r 
a  reasonable  excuse  for  their  existence.  It  may  be 
objected  that  this  is  a  way  of  getting  money  which 
might  be  easily  abused,  but  in  practice  this  does  not 
happen.  The  London  market  is,  at  all  times,  uncan- 
nily in  touch  with  the  position  of  both  the  drawer  and 
acceptor  and  any  attempt  on  the  part  of  either  to  issue 
this  class  of  bill  beyond  what  he  is  legitimately  entitled 
to  on  the  basis  of  his  business  or  financial  standing,  is 
promptly  nipped  in  the  bud,  first,  by  demanding 
higher  rates  and  finally,  by  refusing  to  take  the  paper. 
Either  action  is,  of  course,  detrimental  to  the  credit 
of  the  party  concerned,  and  bankers  and  others  who 
operate  in  finance  bills  are  most  careful  to  leave  a  large 
margin  for  safety  in  their  use  of  the  very  sensitive  dis- 
count market.  It  is  plain  from  the  above  explana- 
tions that  when  many  of  these  finance  bills  are  drawn 
on  liondon  they  will  have  a  tendency  to  lower  the 
rate  of  exchange  by  increasing  the  supply  of  sterling 
bills  on  the  market. 

In  the  above  illustrations,  London  and  New  York 
alone  have  been  referred  to;  finance  bills,  of  course, 
obtain  between  other  countries  but  to  a  much  less  de- 
gree. 


FrN'ANCE  BILLS 


151 


7.  Forward  fJcAanflrp.— Operations  in  "forward  ex- 
change" have  several  points  in  common  with  finance 
hills;  both  anticipate  fluctuations  in  the  rate  of  ex- 
change and  lM)th  involve  a  large  clement  of  risk.  In 
its  simpler  and  more  commercial  form,  forward  ex- 
change or  "futures,"  as  it  is  sometimes  called,  is  a  term 
used  to  express  the  l)ii.\  itig  or  soiling  of  foreign  ex- 
change for  future  df  iivory.  1  or  i-istance,  in  July,  a 
manufacturer  in  Cun.ida  acc'.'pt ,  an  order  for  goods  to 
he  manufactured  aiuJ  sliipi  ed  i»  5  nwland  before  Oc- 
tober 13th.  Knowing  lif.m  e.yperitnce  that  a  change 
in  the  rate  of  exchange  in  ( Atoher  might  make  serious 
inroads  into  his  profits,  he  asks  his  bank  to  quote  him 
a  rate  for  the  amount  of  his  shipment,  and  contracts 
to  deliver  the  bills  of  exchange  to  the  bank  in  Octol)e.-. 
In  this  way  the  rate  is  definitely  fixed,  and  the  li .k  ?•; 
a  falling  rate  is  eliminated. 

The  bank  can  protect  itself  in  two  ways;  by  >.t  i;in,4 
its  own  bills  to  fall  due  in  October  in  London,  ».r  hy 
selling  London  exchange  for  future  delivery.  Ac  f;!i 
as  the  obligation  is  corcerned  both  cases  amount  to  tiie 
same  thing,  except  that  in  the  latter  no  money  trans- 
action is  involved.  The  decision  of  the  bank  is  gov- 
erned by  the  rate  of  interest  obtaining  in  London  in 
July.  It  is  obvious  that  dealing  in  forward  exchange 
is  not  necessarily  based  on  an  Hctual  prospective  trans- 
action. 

Franklin  Escher,  in  his  book,  "The  Elements  of 
Foreign  Exchange,"  in  reference  to  the  making  of 
money  in  dealing  in  "futures,"  says: 


158      DOMESTIC  AND  FOREIGN  EXCHANGE 


I 


As  a  means  of  making — or  of  losing — ^moncy,  in  the  foreign 
exchange  business,  dealing  in  contracts  for  the  future  deliv- 
ery of  exchange  has,  perhaps,  no  equal.  And  yet  trading  in 
futures  is  by  no  means  necessarily  speculation.  There  are 
at  least  two  broad  classes  of  legitimate  operation  in  which 
the  buying  and  selling  of  contracts  of  exchange  for  future 
delivery  plays  a  vital  part. 

Take  the  case  of  a  banker  who  lias  bought  and  remitted 
to  his  foreign  correspondent  a  miscellaneous  lot  of  foreign 
exchange  made  up  to  the  extent  of  one-half,  perhaps,  of 
commercial  long  bills  with  doruments  deliverable  only  on 
"payment"  of  the  draft.  That  means  that  if  the  whole 
batch  of  exchange  amounted  to  £50,000,  £25,000  of  it  might 
not  become  an  available  balance  on  the  other  side  for  a  good 
while  after  it  had  arrived  there — not  until  the  parties  on 
whom  the  "payment"  bills  were  drawn  chose  to  pay  them 
off  under  rebate.  The  exchange  rate,  in  the  meantime,  might 
do  almost  anything,  and  the  remitting  banker  might,  at 
the  end  of  thirty  or  forty-five  days,  find  himself  with  a 
balance  abroad  on  which  he  could  sell  his  checks  only  at 
very  low  rates. 

To  protect  himself  in  such  a  case  the  banker  would,  at 
the  time  he  sent  over  the  commercial  exchange,  sell  his  own 
demand  drafts  for  future  delivery.  Suppose  that  he  had 
sent  over  $25,000  of  commercial  "payment"  bills.  Unable 
to  tell  exactly  when  the  proceeds  would  become  available, 
the  banker  buying  the  bills  would,  nevertheless,  presumably 
have  had  experience  with  bills  of  the  same  name  before,  and 
would  be  able  to  form  a  pretty  accurate  estimate  as  to 
when  the  drawees  would  be  likely  to  "take  them  up"  under 
rebate.  It  would  be  reasonably  safe,  for  instance,  for  the 
banker  to  sell  futures  as  follows;  £5.000  deliverable  in  fif- 
teen days,  £10,000  deliverable  in  thirty  days,  £10,000  de- 
liverable in  forty-five  to  sixty  days.  Such  drafts  on  bein^' 
presented  could  in  all  probability  be  taken  care  of  out  of 
the  prepayments  on  the  commercial  bills. 

By  figuring  with  judgment,  foreign  exchange  bankers  arc 
often  able  to  make  substantial  profits  on  operations  of  this 


FINANCE  BILLS 


kind.     An  exchange  broke 


153 


r  comes  in  and  offers  a  banker  here 

that  heW,j,r-hir:«.;'S'^::.^^,^'':^'^^«nd. 

time  the  commerciai  drafts  are  ant  tn  hi      L       /     "  .  ^^^ 

at  a  price  which  means  a  gooVS  t  pr^fit"^"  Th^    ■"  "''.**^' 
ties  up  capital    it  is  fr„„    k  t  •        P^°\'^-      ^"e  operation 

Not  i^r4^J;'^:i^z^^:^,^i^'^^  ^'t 

bought  at  such  a  price  anrl  h,nT     ^i,  *"  ''*  '^"n  ^ 

them  at  such  a  pr  ce  thatlher "  i    1   ^"»"-%-''  against 
be  made.  '  '"  "  'Substantial  profit  to 

agSt^ititt!:^":"'''::^'?^  f-  -'  '"*"''^"'  ^"*"-.  not 

against  exporters'    uturesFn'T'^'T'    ""'''""^^    ''"* 
quontly  quote  prices  tn.,',  /'"P"'"*';"  "^  merchandise  fre- 

be  madeVsom"^.  folowin"    r;r  f '''"':'  f-  shipment  to 

price  the  exporter  i^aTo^v'."  T^"^^''^  ^^''^  fi^^d 

-:tt^\.^fz^«^oT[;--^r:^^ 

lard  bills,  'anjVetf  ihe";';;^^  Z°h*"  *««^A  ^^  •"' 
without  tving  UP  a  dnll«r     /        -x  T',*''""'  any   risk  and 

one-half  centVrVoutterL:?,:'tth  "T''^  ''"^  """^^ 
■shipment.     In  Ma v    thn  ]»rJwu       •„      ''"''^  ^"""""^  °f  the 

1.0  will  pay  forZm*'rt  altfo^'4'867r;'"  ^°  '''"''  -'' 

and  delivering  his  own  draft^ainlt^S^ -"  '""'"^  "'"""' 

t-ereTreTnt;;  to°i;'"7^''^  ^^P"-"  X  .t^He  U 

fo  sell  theh^excSgc  ft  ttureTr'^  *'""  s*"""^  '^'"'  -"* 
"f  the  banker's  "fV.tMro  "       \      i  ''^'"ory.     As  to  the  buver 


15*     DOMESTIC  AND  FOREIGN  EXCHANGE 


transactions.  Like  operations  in  exchange  arbitrage,  there 
is  no  limit  to  the  number  of  kinds  of  business  in  wliich 
"futures"  may  figure.  Thev  are  a  much  abused  institution, 
but  are  a  vital  factor  in  modern  methods  of  transacting 
foreign  exchange  business. 

HEVIEW 

What  is  a  finance  bill? 

Show,  by  an  illustration,  what  arranjrements  a  New  York 
banker  makes  with  a  London  bank  before  drawing  a  finance  bill. 

Give  an  example  of  how  a  finance  bill  on  London  account  is 
created. 

How  does  the  London  market  prevent  either  a  drawer  or  an  ac- 
acceptor  of  finance  bills  from  issuing  them  beyond  the  amount  to 
which  they  are  legitimately  entitled .' 

Describe  an  operation  ia  forward  exchange. 


CHAPTER  XI 

ARBITRAGE 

tune    called,  .ndirect  exchange,  is  a  term  applied  to 
.nytransaefon  which  takes  advantage  of  differences 
of  pnces  for  the  same  article  in  different  n.arkets. 
Arbitrage  js  thus  defined  in  the  Centun-  Dictionarv: 
The  calculation  of  the  relative  value,  at  the  same  time 
at  two  or  more  places  of  stocks,  bonds  or  funds  of  any 
sort   includrng  exchange,  with  a  view  to  taking  ad- 
^antage  of  favorable  circumstances  or  differences  in 
payments   or   other   transactions."     This   definition 
should  mclude  gold  and,  in  a  general  sense,  anv  otTe^ 
commodity.     Wheat,  for  example,  may  be  sent  from 
one  place  where  .t  is  relatively  cheap  to  another  where 
t  IS  relatively  dear;  this  is  arbitraging  i„  wheat. 

,,'fu  P'"'Vr  °""  .'""'^^t  '"d"'^^  ^''ipnients  from 
narkets  with  low  pnces  and  this  process  constantly 
tends  to  equalize  prices  generally. 

2.  When  arbitrage  is  transacted.— ArhitTase  trans- 
actions are  confined  entirely  to  large  financial  centers, 
such  as  London,  Xew  York  and  Paris.  The  work 
calls  for  expert  knowledge  and  a  close  studv  of  finan- 
cial conditions,  as  it  is  essential  that  the  arbitrageur 
l^eep  in  daily,  if  not  hourly,  touch  with  his  foreign 

155 


'I 


J 


-tti 


.:::M^:^Me 


156      DOMESTIC  AND  FOREIGN  EXCHANGE 

correspondents,  in  order  that  thej-  will  be  prepared  to 
carry  out  a  transaction  without  delay. 

A  recent  article  in  the  Nexv  York  Financier  says: 

In    conducting  such   operations   it   is   essential    that   the 
banker  shall  be  advised,  thru  the  cable,  of  the  varying  con- 
ditions of  the  markets  abroad.     In  such  niarketsas  Paris 
and  London,  where   the  exchange  transactions   are   always 
large,  rates  often  fluctuate  sharply  and  conditions  change 
frequently.     Consequently,  tho  the  situation  may  be  favor- 
able one  day  it  may  suddenly  become  adverse,  necessitating 
some  modification  of  the  method  of  arbitraging.     Moreover, 
it   frequently  happens   that  after  a   successful   negotiation 
has  been  effected  by  a  banker  as  the  result  of  private  infor- 
mation, his  competitors  may  be  advised  of  the  favorable  con- 
ditions prevailing  and  they  also  may  draw  in  a  similar  man- 
ner.    Hence  each  operator  seeks  to  obtain  for  himself  alone 
all  possible  information  regarding  changes  which  are  likely 
to  affect  his  business.     Sometimes  a  banker  may  find,  upon 
calculation,  that  it  will  be  profitable  to  conduct'arbitraging 
of  exchange  between   three  or  more  points:  in   such  cases 
the  conditions  at  each  of  the  points  must  first   be   ascer- 
tained and  calculations  have  to  be  made  with  the  utmost 
care.     Occasionally   in  drawing  bills   the  banker,   in   onkr 
to  take  advantage  of  arbitraging  operations,  will   transfer 
credits,  thru  the  cable,  from  an  adverse  center  to  a  point 
favorable   for   his   purpose.     Indeed   there   are   very   manv 
ways  by  which  arbitraging  can  be  profitably  conducted  bV 
bankers  having  the  requisite  facilities  and  the  necessary  skill 
for  such  operations.     It   will   be  observed   thiit   operations 
in  arbitraging  of  exchange  require  the  services  of  men  of 
the  largest  experience,  and  hence  the  business  can  be  con- 
ducted  to   advantage   only   in   the   most   thoroly   equipped 
offices.     The  exchange  student  who  enjoys  opportunities  for 
practice  in  such  offices  and  has  the  determination  to  qualify 
himself  for  this  branch  of  exchange  work  by  acquiring  "a 
knowledge  of  all  of  its  intricate  details  will" have  no  diffi- 


ARBITRAGE 


culty  after 


field  for 


qualificat 
operations 


;ion  in  secu 


I  ring 


bitraging  of 


IN  .„,1  -'^'.7,   "■"  "'  "^oitragmg  ot  exchange  is 
'{  "^llt^'t'  ^-den-ng.  and  there  will  prfbabi 


137 

advancement.     The 
continu- 


ays 


I.  a  de„.a„d  fc/r  the  servi^^  ;f';:„  c^^^/^^'T^;';;:^ 
t.ons  as  managers  of  exchange  houses  or  departments*  ^ 

3  P«n7//.-A  parih-  is  the  price  at  which  a  bill 
hould  be  quoted  in  order  to  co.npare  it  with  the  quo- 
tations for  similar  bills  elsewhere.  To  make  thU  com- 
panson  it  is  of  course  necessary  to  express  every  quo- 
tation ,n  a  common  form.  Care  must  also  be  taken 
to  bnnff  quotations  for  lon^.  bills  to  a  demand  basis, 
by  allowing  for  stamps  and  interest. 

If  the  New  York  parity  on  Paris  is  .5.1895  as 
agamst  the  actual  rate  of  5.16%  in  New  York  for 
Paris  checks,  an  opportunity  for  arbitrage  profit  of 
2.07  centimes  per  dollar  is  offered.     On  $100  this 
amounts  to  40  cents,   and  on  $48,754.56  to  $195. 
Bankers  who  engage  in  arbitrage  transactions  gen- 
erally construct  a  parity  fable  for  ready  reference  be- 
tween the  more  important  exchanges.     The  following 
IS  an  e.xample  of  such  a  tabic,  showing  parities  in  dol 
lars    francs  and  sovereigns.     Similar  tables  may  be 
made   for  sterling,   „,arks  and   dollars,  for   francs, 
marks  and  dollars,  etc. 


£1  = 

*4.S5 
4.8514 
4.8Sl| 
4.85% 


25.-'0 
$1 

4.1959 
5.193.' 
5.1905 
5.1879 


2J.-JI 
$1 
5.1979 
5.1953 
5.ig:?6 
5.1900 


25.23 
*l 

5.J0 
5.1973 
5.1947 
5.19^0 


25.23 

*1 

5.1994 
5.19(i7 
5.1910 


25.24 

«1 
5.2041 

5.2014 
5.1988 

5.i9i;i 


25  25 

$1 
5.2063 
5.2035 

5  ,'008 


When  the  New  York  quotation  for  sterling  is  $4  85 
and  the  London  quotation  for  francs  25.20,  the  Xew 


4 


r  ■^-.■t^S^mMSM^^AT:  ■ 


158      DOMESTIC  AND  FOREIGN  EXCHANGE 

York  parity  quotation  for  francs  is  5.1959;  if  the  mar- 
ket rate  differs  from  this  there  is  an  opportunity  for 
arbitrage.  Conversely,  given  the  two  franc  quota- 
tions, the  table  shows  the  parity  of  the  pound  sterling 
in  New  York,  or,  given  the  sterling  and  franc  rate  in 
New  York,  the  table  shows  the  parity  quotation  of 
francs  in  London.  Intermediate  rates  can  be  arrived 
at  by  interpolation.  For  instance,  in  the  example 
given  in  Section  6,  the  sterling  rate  is  4.8560,  the 
nearest  quotation  in  the  table  is  for  4.8550— a 
quarter  cent  making  a  difference  of  .0026  centime 
(5.1905  —  5.1879)  in  the  quotation.  Therefore, 
-i|-  X  .0026  =  .0010  centime  deducted  from 
5.1905  =  5.1895.  The  table  is  calculated  by  divid- 
ing the  value  of  the  sovereign  in  francs  by  its  value 
in  dollars,  thus     ~^  =  5.1895. 

4.  Parity  in  stocks.— Parity,  when  applied  to  a 
stock,  means  the  price  which  is  its  equivalent  when 
quoted  in  a  different  market.  For  instance,  the  Lon- 
don price  of  a  stock  exceeds  the  New  York  price 
of  the  same  stock  by  about  2/{>  or  3  per  cent,  after 
the  exchange  rate  and  the  London  method  of  quot- 
ing American  stocks  ($5  to  the  pound)  are  taken 
into  consideration.  With  a  cable  rate  of  4.87'/i  the 
London  parity  of  New  York  stock  at  68  would  be 
69.75. 


N   Y  naritv  _ ^""'^""  P"'''ty  X  rate  of  exch. 


London  parity 


New  York  purifri-  X  i        fift  X  i 


Kate  uf  exchange 


5=68. 


=  69.74. 


A 


ARBITKAGE 


15» 


In  commodities,  the  prices  at  two  different  centers 
are  at  parity  when  the  difference  represents  only  the 
actual  cost  of  transportation,  insurance  and  interest 

5.  Chain  rule.— Most  of  the  calculations  in  arbi- 
trage transactions  can  be  put  in  the  form  of  simple 
wiuations,  and  require  only  correct  reasoning  for  their 
solution.  A  quick  tho  mechanical  method  of  calcu- 
lation IS  called  the  chain  rule.  It  consists  of  arrang- 
ing the  terms  of  the  exchange  of  the  various  currencies 
under  consideration,  in  such  a  manner  that  the  re- 
quired equivalent,  or  paritj-.  is  easilv  obtained.  A 
study  of  the  following  example  will  make  the  method 
clear: 

Berlin  check  rate  on  New  York  i,  9.5  cents  per  4  marks, 
Ucrlin  check  rate  on  London  is  20.5  Miark.s  per  £1, 
i-UKi  the  parity  of  tlie  sovereign  in  .\ew  York. 
How  many  x  =  b  .$x   =  £1 

'{  ^  =  <;  £1    =  20..5  murks 

and  c   =   d  Mks.  400   =   $95 

and  d   =   10  X 

^        1  X  ill.-,  X  9.5       ^ , 

""  =  -^Vlm-  =  «4.86875 

The  last  term  is  always  in  the  same  currency  as  the 
unknown  quantity,  or  first  term.  It  will  be  noted  that 
these  equations  are  arranged  in  such  a  manner  that  the 
-lenommations  are  in  .sequence  like  the  links  of  a  chain- 
licnce  the  name.  The  value  of  the  unknown  quantity 
( X)  IS  then  taken  as  equal  to  a  fraction,  the  quantities 
on  the  right-hand  side  forming  the  numerator,  an<l 
those  on  the  left-hand  side,  the  denominator.  The 
product  of  the  numerator  divided  by  that  of  the  de- 
Xth-i* 


'A!2i..~a 


'■if'tv^-i''  ^^..-..n'- 


160     DOMESTIC  AND  FOREIGN  EXCHANGE 

nominator  will  give  the  required  answer.  "Chain 
rule"  is  applicable  to  all  kinds  of  exchange  and  mer- 
cantile calculation!). 

How  many  dollars  (x)  =£1 

If  the   Htight  of  £1      =  123.274  grains  standard  gold 

If    12    grains    of 

standard   gold  =11  grains  of  fine  gold 

And  il   9'»2.2  grains 

of  'lie  gold  =  $10 

I   >    IM.-'T+X  11  X  10 

^-     '1XK'XJ3I5 —  =$4.86656 

6.  Simple  arbitrage.— The  rate  of  exchange  be- 
tween two  or  more  places  corresponds  or  tends  to  cor- 
respond. In  a  preceding  section  it  was  shown  how 
exchange  rate  between  two  places  is  almost  auto- 
matically adjusted.  Similar  influences  in  the  form  of 
arbitrage  are  brought  into  operation  to  synchronize 
the  exchange  rates  the  world  over.  There  is  thus  a 
certain  sympathy  or  relation  between  all  foreign  ex- 
change (juotations.  The  quotations  in  Xew  Vork  for 
exchange  on  Berlin  or  Paris  are  largely  influenced 
by  the  price  of  sterling  exchange.  If  ihc  price  of 
marks  in  \ew  York  should  fall  to  a  point  where  there 
would  be  a  profit  in  an  arbitrage  transaction,  the  de- 
mand for  drafts  on  Berlin,  by  those  who  wisli  to  make 
this  profit,  would  almo.st  immediately  force  the  mark 
quotation  up  again.  Similarly  New  York,  while  a 
debtor  to  England  with  consequent  high  sterling  rates, 
may  be  the  creditor  of  France  or  other  countries  in 
Europe,  and  drafts  on  these  countries  are  remitted  to 


AHBITKAGE  jgj 

London  and  thus  ten,!  to  improve  (i.e..  lower)  the 
rate  of  sterhn«  exchange.  When  only  three  places 
are  involved,  the  transaction  is  called  simple  arbi- 
trage.  '■ 

To  give  a  concrete  case  of  simple  arbitrage:  Sup- 

London  check  rate  in  New  York.  .  .  ..$4,8560  rxr  £ 

Pans  clieck  r«tc  in  .\e«  York Ls    Tu'n.r  « 

T-ar.  check  rate  in  London fc  .5^;e^l  '^ 

A  brief  calculation  or  a  glance  at  his  table  of  pari- 
ties shows  that  there  i.s  a„  opportunity  for  a  profit- 
able arbitrage  in  francs  between  London  and  New 
.}-TL  ^'^^'f^''  «-"^  «  draft  on  Paris  for  Fes. 
2o2,000  at  .,.10'/s  and  with  the  proceeds  buys  a  draft 
or  £10.000  at  4.8500  per  £,  at  the  same  time  cabling 
his  Lon<lon  correspondent  to  purchase  a  draft  for 
t  OS.  2O2.000  at  25.20  per  £,  or  better,  and  send  it  to 
1  aris  to  the  credit  of  his  account  th.re.     This  i,u,- 
chase  costs  £10,000  and  is  provided  for  by  a  draft  for 
the  same  amount  remitted  from  New  Vork      The 
banker's  position  is  now  as  follows: 

Sale  of  francs  852,000  at  5.16%  <6j.fi  t.  rc 

Purchase  of  draft  for  £10.000  at  i.8560  io  '^***' '"^-'^ 

T«I  P"'"^'"'''*^  "f  ^^>^-  2-52.000  in  Lon<l.,n 
at  z.'j.SO.  ... 

48..)(i0.00 

Profit    ,  

$l!)4..'-.6 

Without  using  any  of  i,is  own  capih.l  and  without 
any  expense  except  the  cost  of  a  cable  and  a  small 


1 


l(ia      IWMESTIC  AND  FOREIGN  EXCHANGE 


vnminission  to  his  London  and  Paris  correspondents, 
the  banker  has  made  a  profit  of  over  $190.  The  re- 
sult of  this  and  similar  transactions  made  at  the  same 
time  by  other  New  York  bankers  would  be  to  lower 
the  New  York  rate  for  francs  by  increasing  the  sup- 
ply, and  to  raise  the  London  rate  for  francs  by  ab- 
sorbing the  supply,  thus  tending  to  equalize  rates  all 
round. 

7.  Compound  arbitrage. — The  example  of  arbi- 
trage just  given  is  of  the  simplest  form,  but  it  is  typi- 
cal of  such  transactions.  The  banker  might  have 
found  it  more  profitable  to  provide  cover  for  his  draft 
on  Paris  by  remitting  marks  to  Berlin  and  purchas- 
ing his  francs  there,  or  he  might  have  instructed  his 
London  correspondent  to  purchase  and  remit  a  draft 
to  Berlin  with  instruction  to  the  Berlin  bankers  to 
remit  francs  to  Paris.  In  the  first  instance  he  sim- 
ply substitutes  Berlin  for  London  in  the  trans- 
action, but  in  the  second  instance  he  would  operate 
both  thru  London  and  Berlin;  four  places  are  in- 
volved, and  the  transaction  is  known  as  compound 
arbitrage. 

The  study  of  arbitrage  operations  is  both  interest- 
ing and  instructive.  The  following  transaction  will 
bring  out  some  of  the  underlying  principles  more 
clearly ; 

PROBLEM :  It  is  desired  to  transfer  $100,000  from  New 
York  to  London  on  the  basis  of  the  data  given  in  the  first 
column.     Which  method  of  remittance  should  be  selected? 

It  is  first  necessary  to  bring  every  quotation  to  a  conmion 


ARBITRAGE  168 

form;  for  example,  how  many  dollars  oqnal  £1.  Cart-  must 
bo  taken  to  brmg  quotations  for  long  bill,  l„  a  check  basis 
allowmg  for  stamps,  etc.  The  low.,t  parity,  in  dollar*  will 
l>e  the  elK.aptst  method  of  innitting  to  London,  but  the 
dearest  return  (remittin^f  from  London  to  \e»-  York)  eon- 
^erscIy  the  highest  parity,  is  Uie  dearest  renuttanc.  and  tlie 
'  lieapest  return: 

^"'■•""■^  =  r«lrulati<.n :  1^  |>rlc-  of  £| 

A     I(iTll»  rh«I<  |„  NVw  York.  $\  -  fi  ,  i»-.k  '''*''' 

Mk.  t^fl.',  cenls  1=1).  \lk 

Berlin  check  in  London,  ♦- lli     ' 

£I  =  Mk.  ».5  ~ 

^  '^"'i'^ = MltJ." '"  "•■^""'       .,.^ = T'y:  k    ■**•""" 

30  ao  o-tits  per  kronen *X  =  jtl  ■"•"'!».» 

Vienna    chc-ck    rate    on    I.oti-  fIO=r  iK(  |7i/, 

dcin,     i40.1T14     kronen     ,.er  I  =  iO.io  oentc. 

I     l^ndon      6()-dH.v.,      draft      in  m.Hi  plus  .o...-,i         '*     ^ " 

New  York,  »*.M («;,  .lays' interest  '1-; , 

and   stamps  JKin       UMIli 

°     ^'s,  -  ?   '*'7t}"    '■""''  SxTfl^dic^k 

'•  —  res.    i.iei^  1=252  fc'.i 

Paris  check  In  London,  ,,  i,,).  _,,' 

H    P.rh.  check  in  New  York,  s^  =  f.^^iiU         *^ «"* 

**  ^^  ecs.     J.i  j^i  I  zr    >■    >  f        1  L 

Paris  cheek  in  London,                  .5  l.Sfi'i  — «i' 
£1  =  Fes.  i6M 

X  -  Umr2  ,^.8872 

A  study  of  the  above  calculations  shows  that  the 
cheape.st  method  of  remittance  would  be  thru  Berlin- 
a  pound  sterling  costing  $4.8687.     The  transfer  could 


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lANSI  and  ISO  TEST  CHART  No.  2) 


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161      IIU.MESTIC  AND  FOKKIGN   EXCHANGE 

he  made  either  by  forwarding  to  London  a  check  on 
IJerlin  or  by  instructing  the  Berhn  correspondent  to 
(h'aw  on  New  York  in  favor  of  London.  Tlie  ster- 
ling e(juivalent  of  $100,000  on  this  basis  would  be 
£20,539:3:0. 

Tiie  dearest  method  of  remittance  is  via  Paris,  the 
difference  between  the  Paris  and  the  Berlin  rates  be- 
ing 1.8,5  cents  per  £,  or  $375  on  a  transfer  of  $100,000. 
The  sterling  ecjuivalent  of  $100,000  on  this  basis  would 
be  £20,401 :0 :0.  It  siiould  be  noted  that  as  the  Paris 
method  of  remittance  is  the  dearest,  it  is  the  cheapest 
return  and  would  tlicrel'ore  be  selected  for  the  trans''- 
fer  of  money  from  London  to  New  York. 

8.  Arbitraye  in  gold. — Arbitrage  transactions  in 
gold  and  silver  are  of  a  great  variety  but  they  are  all 
founded  on  the  idea  of  sending  bullion  to  some  point 
wliere  it  can  be  used  to  buy  exchange  cheaply  on  some 
other  point.  The  one  best  known  of  these  is  the  so- 
called  "triangular  operation,"  in  which  gold  is  shipped 
to  Paris  or  some  other  European  market  for  tiie  pur- 
pose of  buying  exchange  on  London.  The  process  is 
as  follows:  Tl;c  '^old  is  shipped  to  P  uis,  and  exchange 
an  I^ondon  is  liiere  purchased  with  the  proceeds. 
This  exchange  is  remitted  to  London  for  tiie  credit  of 
the  American  bank  shipping  the  gold;  the  balance  so 
created  offsetting  a  demand  draft  drawn  by  tlie  lattei 
on  I>ondoii.  The  following  are  the  details  of  an  ac- 
tual shipment: 

43.5nn  ounces  hnr  gnlrt   flSS  fine  at  fe0.56M ¥997.567 

Fri-iL'llt,  1  's  per  cent SI  .MT 

InslirillUT.  tV.  crnts  piT  $100 ♦M 


AUBITUAGE  l(j5 

Assay  ofBrp  charge,  I  cenU  [kt  $100. .  e,,^ 

interest  (i  .l,,y,  ,a  J  ,,rr  .l-nt r'^, 

Ciirtafii.-  iiiul  paiki'iir 

Cum.    in   I'arii ''" 

^JU    $       2.740 

Hank  of  IVanri-  huys  pold  .99,5  fine  at  fcs    Migsi  ,  •,       *''"''"''l'' 

(=  10(;.:iToi  ,ran<;  p.r  tr„v  „ume)  '  ''"  ■"'" 

R-s   5,1,;n9„9  at  .'.5.10  ^i.M      *'"'''"' 
i.'Uj^JO  ut  i.bOIO  zz 

?l,onn,:u.' 
Profit ^  Jj^ 

The  f,.ll«wi„cr  are  ecrulitions  u.i.ler  which  there  is 

IJi-acticaiiy  no  profit  or  loss: 

Xew  York  Exchange  on  London 4.8O70 

1  aris  Exchange  on  London 25.10 

Money  in  Xew  York  .  .., 

■^  /» 

RKVIEW 

What  is  arbitrage,  and  what  may  it  include.' 
WImt  req.iireme..t.s  are  necessary  in  the  work  of  an  arbitraeeur' 
Define  a  parity.     Give  an  example.  ''n  arouraReur . 

What  IS  meant  by  parity  in  stocks' 

,.oun7I'r,  ■L';;;^'"'^'^''  ''"  '"«"™-  ■«■'--  -pie  and  com- 
What  is  tlie  essential  idea  in  gold  arbitrage? 


■v! 


CHAPTER  XII 


BATES  OF  INTEREST 


1.  Interest  an  important  factor  in  exchange  quota- 
tions.— The  rate  of  interest  at  which  the  difference  be- 
tween long  and  short  bills  is  calculated  is  based  on  thf 
prevailing  rate  of  the  country  on  which  the  bill  is 
drawn.  This  would  not  materially  affect  the  situation 
if  the  rates  of  interest  were  uniform  all  over  the  world. 
but  rates  of  interest  in  different  financial  centers  vary 
considerably  and  these  differences  have  an  important 
bearing  on  exchange.  Under  normal  conditions,  in- 
ternational money  and  credit  circulate  most  freely  in 
the  most  attractive  channels,  and  a  rise  in  the  interest 
rate  in  a  foreign  money  market  will  accelerate  the  flow 
of  outside  capital  to  that  point,  while  a  fall  in  the  rate 
of  interest  will  retard  it.  So,  while  demand  and  sup- 
ply govern  rates  of  exchange,  the  rates  of  interest  at 
home  and  abroad  react  on  these  influences  and  affect 
demand  and  supply.  Their  combined  effect  causes 
the  rates  of  exchange  to  fluctuate  from  day  to  day 
and  thus  the  floating  capital  of  the  world  is  attracted 
from  one  center  to  another. 

2.  Long  bills. — When  we  say  that  exchange  rates 
between  two  countries  usually  fluctuate  between  the 
specie  points,  we  refer  only  to  the  rate  for  demand  or 

166 


KATES  OF  INTKRKST  jg^ 

siffht  bills.  This  is  sometimes  called  the  pure  rate  of 
exchange  as  it  involves  no  time  element  except  that 
required  for  the  actual  transmission  of  the  draft 

Assuming  that  the  rate  at  \ew  York  for  a  sight  bill 
..r  check  on  London  is  4.8725  how  would  the  value  of 
;t  sixty -days  sight  bill  be  ascertained?  As  pavment 
".  the  atter  case  is  deferred  for  sixty-three  dafs  (00 
-ays  +  3  days  grace)  it  will  be  worth  less  ihan  a 
<lemand  bdl  by  the  interest  for  03  .lays  at  the  Lon.lon 
;^He.  Ihe  calculation  is  based  on  the  London  rate  of 
interest  because  the  holder  of  the  bill  in  London  can 
always  discount  it  at  the  prevailing  rate 

Assuimng  that  the  market  discount  rate  for  prime 
Mhis  3%,  the  rate  for  a  sixty-days  bill  would  be  ar- 
rived at  as  follows: 


Demand  rate  per  €100. 
Less  6,'j-(|ays  interest.  . 
Stamp  Yjf) 


2..52 
.24 


$484.49 


corresponding  to  the  nearest  commercial  rate,  the  fig- 
ure would  be  '*  ■  S4.50.  ** 

If,therefo.  ^x- know  the  rate  of  interest  prevailiW 
-n  foreign  markets  and  the  stamp  taxes  imposed  by 
foreign  countries,  the  rate  for  any  long  bill  can  readily 
l>e  computed  from  the  demand  rate. 

3.  Bank  rate.~In  London,  the  bank  rate  is  the 
■n.nimum  rate  at  which  the  Bank  of  England  will  dis- 
count prime  three  months'  bills  or  advance  money 
against  approved  securities.     This  rate  has  a  direct 


168      DOMKSTIC  AM)  FOUKKiN   I'ACllANGK 


relation  to  the  foreifjii  exchanffe  rate  and  ilie  inove- 
nicnt  off"()l(l.  ^\n  increase  in  tiie  rate  raises  tiie  value 
of  money  and  attracts  ^old  from  foreign  centers;  the 
lowerinjf  of  the  rate  tends  to  lower  tiie  value  of  money 
and  causes  its  withdrawal.  The  Hanl<  of  KnjfJaiul 
sometimes  insures  the  effectiveness  of  the  rate  l)y  hor- 
rowin^-  money  ii"  the  open  market,  tiuis  denudiiifj  it  of 
supplies.  Tlie  Bank  of  En<>lan(i  is  f>()verned  in  its 
action  in  raising  or  lowerinj^  tile  rate  by  the  relation 
which  its  reserve  of  gold  bears  to  its  deposits.  This 
proportion  is  seldom  allowed  to  fall  below  30  jier  cent, 
while  it  sometimes  rises  above  .50  per  cent,  the  average 
normal  condition  being  about  43  per  cent.  The  im-  ' 
portanee  of  keeping  the  gold  reserve  intact  is  ap- 
preciated and  it  is  most  important  to  the  country,  as 
the  Bank  of  England  is  primarily  a  bankers'  bank 
and  in  a  great  measure  controls  the  gold  reserve  of 
all  the  British  banks. 

In  Paris,  the  bank  rate  is  that  fixed  by  the  Bank  of 
France,  in  Berlin  that  of  the  Imperial  Bank.  In  Xew 
York,  the  bank  rate  is  the  uniform  rate  of  the  banks 
as  distinguished  from  the  varying  rates  of  the  other 
icnders. 

4>.  Market  rate. — The  market  rate  of  discount, 
also  known  as  the  open  market  rate  or  private  rate,  in 
contradistinction  to  the  official  or  bank  rate,  is  the  rate 
charged  by  bankers,  bill  brokers  and  others  discount- 
ing bills  of  exchange.  Because  of  competition  it  is 
usually  a  little  lower  than  the  bank  rate,  but  as  a  rule 
follows  the  latter  very  closely. 


R-     '•:.S  OF  INTKKKST  ic,>) 

Clean  bills  drawn  up,.n  bankers  are  discounted  at 
t be  ,,^^  ate  rate,  wbile  tb,.se  ,lra«  n  u,k.„  Hrn.s  in  .ro.xl 
s  arubn-  are  generally  dise,.,inted  at  about  U  per  eent 
alKive  tlie  i)rivate  rate. 

Tbe  Hank  of  Kn-ian.i  rate  governs  the  rate  of  ir.- 
erest  paid  on  deposits  by  the   London  joint  stoek 
'a.iks.        h,s  rate  is  generally  ll,  j,er  eent  l)elow  the 
Jiank  ot  Kngland  rate. 

.5.  lictirvmcit   ratc.~ln   eases    where    bills    have 
'locuments  attached,  with  instruetions  to  aeeept  pav- 
".ent    under  a  rebate  of  !.  per  eer.t  above  the  rate  .".f 
mte  est  allowed  on  deposits  by  joint  stoek  banks,"  if 
l.e  bank  rate  were  4  per  eent  the  .leposit  rate  would 
be  Zr,  per  eent  and  the  rebate  rate  three  per  eeM 
lh.s  ,s  known  as  the  "retiren.ent"  rate,  and  the  bill  is 
iia.d  to  be  taken  up  "under  relmte"  in  order  that  the 
drawer  n.ay  obtain  possession  of  tbe  relative  goods  be- 
ore  nuitunty.     Sueh  bills  are  known  as  D/P  bills 
doeu.       ts  on  payment)  and  are  r.ot  discounted  oy 
r-nglish  banks.  ' 

0.  Importance  of  the  Bank  of  England  rate - 
Ihe  movement  of  gold  fron,  one  eountrv  to  another. 
..r  even  the  probability  of  sueh  a  n.ove.n;nt,  is  an  im- 
portant laetor  in  detennining  the  rates  of  exchange 
on  the  countries  affected.  London,  owing  to  the  ex- 
treme sens.t.veness  of  the  Hank  of  Knglarul  rate'to 
gold  movements,  is  particularly  interested  in  its  dis- 
count rate.  Suppose,  for  instance,  on  account  of  a 
W  sterling  rate.  New  York  commences  to  import 
gold  from  London.     The  Bank  of  England,  seeing  its 


ITO      DOMKSTIC  AND  FOREIGN  EXCIIANGF, 


stock  of  ^old  hci'oiiiin^  too  low,  raises  its  official  rate 
of  discount,  "•  '  ii  is  tlic  tcrin  applied  to  the  iniiiiiiiiiiii 
rate  at  which  it  will  discount  :ij)pro\ed  hills.  The 
London  market,  whose  rate  is  usually  a  little  lower 
than  that  of  the  Bank  of  England,  will  j)rol)al)ly  rise 
in  sympathy,  hut  if  it  does  not  do  so  the  Hank  of 
Enjfland,  hy  horrowinj^  money  in  the  ojjcn  market, 
will  force  up  the  rate  and  the  effect  of  dear  money  is 
s(K)n  apparent.  The  forei<rn  money  markets,  in  ordi  r 
to  take  advantajre  of  tiie  hif>her  interest  rate  in  Lon- 
don, will  allow  their  l)alances  to  accumulate  there  for 
investment  or  will  purchase  hills  on  London.  Brit-, 
ish  merchants  will  decrease  their  imports  and  increase 
their  exports.  In  this  way  the  balance  of  payments 
gradually  swings  around  again  in  favor  of  Great 
Britain.  Exports  of  gold,  therefore,  cause  ster- 
ling rates  in  Xew  York  and  elsewhere  to  stiffen  and. 
if  the  high  rate  is  maintained  sufficiently  long,  it 
will  check  the  export  and  eventually  induce  an  inflow 
of  gold  to  London.  Thus,  the  reserves  of  the  Bank  of 
England  will  again  become  normal  and  the  rate  Mill 
then  be  reduced.  The  importance  of  tlu  Bank  of 
England  rate  in  controlling  international  exchange 
and  gold  movements  cannot  be  overestimated,  and  its 
effects  are  so  far  reaching  tha*^  monetary  conditions 
thruout  the  world  are  directly  or  indirectly  influenced 
by  it.  The  rate  is  fixed  by  the  directors  of  the  bank 
on  Thursday  of  each  week  and  tho  as  few  changes  as 
possible  are  made,  the  publication  of  the  rate  is  always 
a  matter  of  interest  to  the  financial  world. 


KATi;s  OF  INTKHKST  17, 

Tl.e  Bank  c.f  Kn^kuul  is.  at  all  times    fullv  .„•.■ 
mr^a  to  make  advances  against  .atis.aX^     „      J 
-al.  or  to  re.l.seouMt  approved  aceeptancc;  at  1 
-inniniun,  rate  of  diseount.     l-aeilities  of  thl        . 
natiirillv f        i-    1-  •"-iiiiits  of  tins  nature 

ti  Its  w  itliout  similar  protection 

7.   ir/>attlu'  Hank  of  Enyhml  rate  effectn  -It  has 
'een  said  tliat  the  Kank  of  En^.Ian.l  rate  acts  a 
'.arometer  of  the  financial  conditt.n  of         .    Hd  Tnd 

"    the  Bank  of  En^.land  states  the  various  resul  s 
^W"ch  are  effected  as  follows : 

'I'lio  discount  rate: 

ovordrafK  on  running  T        l  "^  '"iT"'  '-''-S'^d  ""  '•ash 
,  on  running  accounts,  as  debit  balances  are  een- 

International  Exchange"  by  A.  W.  Margraff 


172      DOMESTIC  AM)  FOHKUiN   KXCIIANC.K 

cralljr  subject  to  the  Bank  rate,  or  '/:;  to  1 ' ;  above,  acoonlinn 
to  agreement. 

5.  Estiihlishes  the  open  market  diseount  rate  in  (Ireiit 
Britain  at  wliieli  jirivute  hankers,  London  joint  stock  com- 
panies and  discouTit  houses  will  discount  pap.r  for  loiiil 
or  foreign  account,  the  rate  ordinarily  heing  from  '/t  to 
K'V"  below  the  Hank  rate. 

6.  Governs  the  "Uetirenient  Kate  of  Discount"  on  docii 
mentary  payment  bills,  which  is  the  rate  of  interest  rebatid 
to  thi'  drawee,  or  acceptor  of  a  documentary  payme  I  bill 
for  the  time  from  the  date  of  retirement  or  prepayment  to 
the  date  of  maturity  of  the  bill,  this  rate  being  W/r  above 
the  rate  of  interest  allowed  by  London  joint  stock  com- 
panies for  short-time  deposits,  which  rate  is  bastd  on  the 
Bank  rate  as  above. 

7.  Affects  the  value  of  all  international  bills  of  exchangi 
as  an  advance  in  the  Bank  rate  either  advances  the  rate  of 
exchange  for  a  demand  sterling  draft  in  a  foreign  country 
or  depreciates  the  worth  of  a  long  time  sterling  bill,  as 
the  interest  rate  for  credit  balances  and  the  discount  rate 
for  long  time  paper  are  indirectly  dependent  upon  the  Bank 
rate. 

8.  Has  the  jiower  of  protecting  the  gold  reserve  held  by 
the  Bank  of  England  and  of  checking  any  protracted  move- 
ments of  gold  importations  by  foreign  notions,  in  so  much 
as  an  advance  in  the  Bank  rate  adjusts  the  rates  of  foreign 
exchange  to  a  point  where  operations  of  this  natur "  becomi 
unprofitable. 

9.  Invites  and  attracts  the  deposits  of  foreign  banks  with 
London  correspondents  as  an  advance  in  the  Bank  rate  to 
a  figure  in  excess  of  the  earning  c(i,)acity  at  home  induces 
continental  money  lenders  to  seek  the  London  market  for 
investment  of  their  funds. 

10.  Indirectly  has  a  tendency  to  depress  or  advance  the 
values  of  stocks  listed  on  the  New  York  Stock  Exchange — 
an  advance  in  the  Bank  rate  causing  a  decline  in  stock 
values,  and  a  reduction  in  the  Bank  rate  usually  having  the 
opposite  effect,  because   the   values   of   stocks   are   largely 


UA'IKS  OF  I\'ii;ui;s  r 


173 


(iopondinf  upon  tho  niomtary  comlitions  ol.taininc  in  NW 
V.rk  an.l  ...s  .V.«  York  Imnk.rs  in  ,,..ri„,|,  „f  .strinK.ncy 
no  .»«vs  n.s„rt  ,,  r.-h.v..  the  .i(u..tion  l.v  ivM.M.^  Kin,.n.-c 
H.  s  (IraHi,  upon  l.nfflisl,  I  kiTs,  tlir  I},u,k  of  KnMan.l  rate 
M»  Mvc.lv  eitl.,..-  fa.il..atc.  ..r  i.-veludc,  tL.r  7.o  /tf 
art  ion. 

UKVIKW 

Wmt  effort  Im,  ihe  int,.r..,t  rat,.  „„  .-xohanffe  quotation,? 

Ulmt  .s  tiK-    .a.>k  r.f  in  London  and  «l,at  r,.|.„ion  l.a,  it  to 

..■  fore.p,  ex<.|,an«,.  rate  and  .1,..  „,ov,.m,.nt  of  ^old?     Wbat  k 

llirl.ank  rate  in:  I' rai.CP.  Berlin,  NVw  Vork'  »  uatw 

n.sous.,  the  market  rate  of  di^^count:  the  retirement  rate 

Show  how  the  Hank  of  Kngland  rate  is  an  im,,ortant  factor  in 
d.termining  rates  of  exchange. 


.a;lj 


(^ 


CHAI'TEU  XIII 


i    ' 


(lOlI)  SIIIl'MKXTS 

1.  Gold  or  xprric  pointM.—Thv  use  nf  hills  of  cx- 
chaiiKC  as  shown  in  Cliapturs  IV  and  VI  eliniiiiatcs.  in 
a  Kreat  nieiisurc,  the  expense  and  trouble  of  shipping; 
jjold  in  payment  of  international  indebtedness.  The 
necessity  of  importinjj  S<>1<1  arises  only  when  the  seller 
of  a  bill  of  exchange  finds  the  price  offered  for  his  bill 
lower  than  the  expense  entailed  in  purchasing,'  j^old  in 
the  foreign  country  and  importing  it.  Similarly,  gold 
is  usually  exported  when  a  purchaser  finds  it  cheaper 
to  ship  gold  to  his  foreign  creditor  than  to  pay  the  ex- 
change rate  demanded. 

In  explaining  exchange  fluctuations,  we  have,  for 
the  sake  of  simplicity,  thus  far  spoken  as  if  a  solitary 
seller  or  purchaser  of  exchange  undertook  the  import 
or  export  of  gold  respectively  whenever  the  rate  be- 
came unsatisfactory.  In  practice,  however,  the  ship- 
ment of  gold  is  confined  almost  entirely  to  bankers 
and  other  large  dealers  in  foreign  exchange  who  have 
special  facilities  at  home  and  abroad  for  undertaking 
such  shipments.  The  merchant,  therefore,  or  even  the 
average  banker,  is  not  ■joncemed  in  gold  shipments, 
tho  he  is  concerned  in  the  rate  of  exchange  which 
the  shipments  are  intended  to  adjust. 

The  cost  of  a  shipment  of  gold  between  any  two 

174 


(JOI.l)  SIIII'.MKNr.-, 


17.-) 


countries  can  only  hv  isfiniatid.  as  it  vaiits  with  the 
si/e  of  tlie  sliipinent  and  the  laeilities  and  knowledge 
liossessed  hy  those  who  undertake  it.  Soinetinies  siu- 
iial  eonecssions  are  offered  hy  a  >f()\ernnient  in  order 
to  eneourage  the  importation  of  gold  into  a  eountr> 
2.  (iold  i-ahiiM.  Landitii  tinil  A'<ti'  i'orl:.  -The 
operation  and  eost  of  irold  shipments  l)et\veen  New 
\'ork  and  the  various  finaneial  centers  of  Euro|  ean 
lie  explained  hy  referenee  to  transactions  with  Lon- 
don, with  whieh  point  the  majority  of  j-old  siupments 
oceur. 

(iold  shipments  l)etwecn  London  and  New  York 
are  made  in  several  forms: 

Valiir  in  I.Hiulun  V/iluein     <-w 

...           , ,   ,                                                      I»r ()umi.  York  iiiT       nee 

bine   p.l.l    liars llt'lITl  l6'(l(i-' 

l.okl  burs— !)(M)  llri,-     IwikI<-^--!»(IO  iln......     ;|.8.>.>9»  is'iioiir,' 

Stamlard    ,n>l<l    l,„r^     Dili-..',    („».-  s,>v.r-  IH.WIKm 

"^'"^    :t.H!m7.i  IH.!)t(ll«.' 

The  Royal  mint  in  London  j)ays  the  ahove  i)riees 
a  fortnight  after  the  gold  is  delivered  to  them.  The 
Hank  of  England  i)ays  on  delivery  at  the  rate  of  77s. 
!><1.  per  oiniee  standard,  the  difference  of  VA.  cor- 
responding to  about  four  i)er  cent  interest  ot\  the  four- 
teen days'  delay  exacted  hy  the  Hoyal  mint. 

The  Bank  of  England  will,  as  a  rule,  buy  eagles  and 
other  coins  (minted  .900  fine)  according  "to  their  full 
weight  at  the  rate  of  70.s.  4^.(1.  and  sell  them  (if  in 
stock)  at  76s.  »d. 

The  United  States  mint  assay  office  in  New  York 
pays  90  per  cent  of  the  above  prices  on  delivery  of  the 

SVII— 13 


^•^ 


176      DOMESTIC  AND  FOREIGN  EXCHANGE 

gold,  and  the  remaining  10  per  cent,  less  a  small  melt- 
ing charge  of  4  cents  per  $100,  a  tew  days  later  when 
the  melting  and  assaying  have  been  completed. 

Gold  sells  according  to  weight  and  degree  of  fine- 
ness and  it  should  be  noted  that  the  values  of  eagles 
and  sovereigns  quoted  above,  are  .900  and  .91()7:i,  re- 
spectively, of  the  value  of  fine  gold  bars.  Gold  bars 
are  seldom  absolutely  pure  by  a  few  thousandths, 
but  their  value  is  easily  established.  A  gold  bar,  for 
instance,  that  assays  .995  fine  is  worth  -joyj-X 
20.671835  or  $20..>68476  per  ounce.  The  London 
price  of  gold  is  always  based  on  standard  gold  91G-3 
fine,  at  £3: 17:  lO'/i  per  ounce  (£3.89375) 

The  ratio  of  the  London  prices  to  those  of  Xew 
York  are  as  1 :  4.80656;  in  other  words,  divide  a  New 
York  price  by  the  corresponding  London  price  and 
the  quotient  is  the  mint  par  value  of  the  sovereign  in 
dollars.  Reverse  the  calculation  and  you  get  the  par 
value  of  the  dollar  in  English  money. 

3.  Gold  shipments  from  New  York—lhe  follow- 
ing description  of  a  shipment  of  $1,000,000  in  gold 
from  Xew  York  to  London  is  taken  from  Dean  Jo- 
seph French  Johnson's  "Monev  and  Currency"  and 
will  serve  as  an  example  of  how  a  shipment  of  gold  is 
made  under  normal  conditions. 

During  the  last  quarter  of  the  nineteenth  century  the 
cost  of  shipping  gold  from  New  York  to  London  fell  from 
three  to  two  cents  per  pound  sterling.  The  charges  for 
freight  and  insurance  botli  declined,  while  the  increased  speed 
of  transatlantic  liners  reduced  the  loss  on  account  of  interest. 


GOLD  SHIPMENTS  177 

The  following  figures,  showing  tlic  cost  of  shippinc 
$1,000,000  in  gold  from  Now  York  to  London,  were  fur- 
nished by  the  representative  of  one  of  tlie  largest  New  York 
banking  houses: 

In.ested  in  fine  bars,  JVOO.OOO  gr.  (4S,:i7i  o^.) $1  OOOOeooo 

\«ay  ofhce  i,re,niu.n  „„  bars,  4  cents  ,,er  *I00 4.  0  « 

freight,  5^  per  cent '...*.  ,T!';'" 

Insurance,  Vi6  per  cent ,:,'■,„, 

racking  and  cartage ■.;:::::::::;;;      Yum 

™^'   """"y    .*l,00.',MTT5i) 

oJ}^^^'!^^  of  England's  "priec"  of  gold  varies  from  7Ts. 
J/i'd.  to  77s.  101/i.d.  per  ounce,  English  standard,  916-'  i  fine. 

J~  ,"1T*/T^  ""  ""'""'  °^  «"''''  English  standard,  info 
ns.  10'/:;d.;  but  the  Bank  of  England,  with  which  it  is  the 
custom  of  bullion  owners  to  deal,  usuallv  pavs  a  fraction 
less  than  this  sum,  thus  saving  itself  from  loss  of  interest 
while  the  bullion  is  being  coined.  It  is  assumed  below  that 
the  bank  pays  77s.  lOd.  per  ounce. 
48,3T5  oz.  fine  =  jJ,77J.7  oz.,  911i::i  fine. 

5J,77i.7  oz.  (,i    77s.  lOd '. *  T„«  ..71 

Deduct  sundry  expenses '.'.'.'.'.'.'.'.'.'.'.'. *-"*.J7+ 

Xet  receipts  in  London ..  ,.|,  ,,-„ 

Cost  of  sovereign   ( l,00i,()J7.5O  ~  J0j,-i70)       *m'«'. . 

-Mint  par  in  United  States '■■■■■■■■'.'.'.'.'.'.'.'.'.'.'.'.'.'.'.]       *S^i 

Cost  of  shipment  per  sovereign ~     S~lili7 

The  reader  will  notice  that  no  loss  on  account  of  interest 
IS  included  in  the  foregoing.  The  New  York  banker  who 
furnished  the  figures  held  that  no  such  item  was  involved, 
for  he  sold  sterling  exchange  as  soon  as  he  made  a  shipment, 
and  so  was  never  out  of  money  in  consequence.  If  ive  include 
interest  for  ten  days  at  three  per  cent  {$8',ir,.5i),  we  raise 
the  cost  of  the  shipment  to  $.01i)7  per  sovereign. 

4.  Gold  shipments  from  Xetc  York  to  Ottawa.— 
At  the  beginning  of  the  war,  Xew  York  found  itself 
with  an  unprecedented  floating  indebtedness  to  Eu- 
rope, estimated  at  from  $230,000,000  to  $300,000,000. 


178      DOMESTIC  AND  FOREIGN  EXCHANGE 

Exchange  became  utterly  demoralized.  CabLs  on 
London  rose  to  $3,  to  $6.50,  and  finally  to  $7  and  re- 
mittances became  impossible.  On  August  14,  1914. 
in  order  to  ease  the  New  York  exchange  situation,  the 
Bank  of  England  signified  its  willingness  to  accept 
payments  in  London  on  New  York  account  against 
the  deposit  of  gold  in  Ottawa,  thus  eliminating  the 
danger  and  expense  of  ocean  shipments  in  time  of  war. 
From  $100,000,000  to  $150,000,000  were  sent  from 
New  York  to  Ottawa  under  this  arrangement  and 
sterling  exchange  was  thereby  stabilized  until  the  fall 
shipments  of  wheat,  cotton,  etc.,  produced  their 
effect. 

The  deposits  were  accepted  in  Ottawa  at  the  fixed 
price  for  gold  bars  of  77s.  6d.  per  ounce  standard,  and 
for  eagles  76s.  OYid.  per  ounce,  equivalent  to  rates  of 
$4.89  and  $4,893,  respectively  per  pound  sterling. 

Under  normal  conditions  the  Bank  of  England  pays 
in  London,  77s.  9d.  per  ounce  for  standard  bar  gold 
(or  at  the  rate  of  $4.8744  per  £)  and  buys  eagles  ai. 
about  76s.  iV^d.  per  ounce  (or  at  the  rate  of  $4.8719 
per  >£ ) ,  and  so  the  difference  between  the  Ottawa  and 
London  prices  of  3d.  or  4d.  per  ounce  was  most  rea- 
sonable, considering  it  would  barely  cover  the  cost  of 
shipment  to  London  under  normal  conditions.  No 
particulars  are  available  as  to  the  dates  on  which  the 
gold  was  returned  to  New  York  after  sterling  ex- 
change became  favorable  to  the  latter.  The  greater 
part  of  the  deposit,  of  course,  was  shipped  on  account 
of  the  Bank  of  England  itself,  tho  some  of  it  was  re- 


GOLD  SHIPMENTS  179 

leased  to  Loncion  and  Xew  Vork  Ii.iiikers  against  pay- 
ments made  in  London. 

For  instance,  in  the  beginning  of  June,  when  cables 
were  $4.78875,  the  Bank  of  Englan<l  released  eagles 
in  Ottawa  against  a  payment  in  London  at  the  rate  of 
r7s.  6! id.  per  ounce,  eiiuivalent  to  tiie  rate  of  $4.7985  ^ 
and,  at  the  end  of  June,  with  cables  at  $4.7725,  stand- 
ard gold  bars  were  released  at  79s.  Id.  per  ounce, 
equivalent  to  the  rate  of  $4.7922.^ 

At  first  glance  the  above  transactions  do  not  appear 
to  be  very  profitable  to  the  Bank  of  England  as  it 
paid  $4.89  for  standard  gold  in  August,  1914,  and 
sold  it  at  $4.7922  in  June,  1915,  while  eagles  were  sold 
at  $4.7985  which  cost  $4.8930,  l)ut  we  must  remember 
that  these  quotations  are  movable  exchange  (dollars 
and  cents  per  pound)  to  London,  consequently  the 
Bank  of  England  followed  the  old  rule  "buy  high,  sell 
low";  and  practically  made  a  profit  of  ten  cents  per 
pound  sterling. 

To  make  this  clear  let  us  take  the  hypothetical  case 
of  a  Xew  York  banker  who  transferred  £10,000  to 
England  via  Ottawa  in  August,  1914,  and  transferred 
it  back  in  June,  1915. 

Aug    13    igu.-For  th.-  flO.OOO  paid  to  his  aooount  in  London, 

he  delivered  in  Ott.iwa  in  ful]  weiirht  eiicles  .  Sisqin 

.lune  5,  lOlS.-For  £10.000  deposited  in  the  Bank  of   F.npland. 

he  will  receive  at  Ottawa  in  eagles .  47,!)fi.i 

(iain  to  the  Banl«  of  England  of ~$     j^ 

Had  the  transfer  been  made  by  cable  at  4.78;s  the 

i37?.093-^-7,M17. 
2  378.9836+  ^  79.083. 


180      DOMESTIC  AND  FOREIGN  EXCHANGE 


i     J 


banker  would  have  received  only  $47,887.30,  so  the 
Bank  of  England  saved  him  $97..>0  on  the  transaction. 

5.  Sliipments  from  Ottawa. — The  actual  returns  of 
several  shipments  made  to  New  York  from  Ottawa 
against  payments  in  London  during  the  summer  of 
1915  are  of  interest. 

1.  Purchase  of  eagles  in  London  by  arrangement 
with  the  Bank  of  England  to  release  by  cable  the 
equivalent  in  Ottawa  for  shipment  to  New  York: 

June  2,  1915.-11,666.913  ounces  of  eagles,  purehiised  at 
77s.  fii/Jd.  per  ounce  ($4.7983  per  £ )  delivery  in  Ottawa 

for  shipment  to  New  York £4«,233-H-n 

3  days'  interest  at  London  call  rate,  2%,  $33.37 7-8-7 

Total  cost  in  London £43,241-  0-7 

June  3,  1915. — Amount  received  in   New  Yorlt. 

$217,090    $017,090 

(Average  weight  $10,000  eagles,  337.423 
ounces) 

Less  express  charges  at  75c $162.90 

Custom  fee  ^l"  1** 

Sterling  equivalent  of $21(i,D2S  „  ,„  „ 

at  4.787^  rate  on  June  2  in  London  for  cable  transfer. .  £45.J98-18-fl 


Net  profit  on  transaction £ 


57-17 


The  Bank  of  England  charged  for  the  gold  at  the  rate 
of  $4.7985  per  pound  sterling,  the  net  cost  delivered  in 
New  York  was  $4.79487  per  pound  sterling,  and  the 
net  amount  realized  by  sale  of  a  cable  in  London  was 
$4.78b,o  per  pound  sterling,  yielding  a  net  profit  of 
.00612  per  pound  sterling  or  $61.20  per  £10,000.  In 
other  words,  each  dollar  cost  the  purchaser  4s.  2.053d., 
which  he  resold  at  4s.  2.117d.  or  a  profit  of  about  one- 
sixteenth  of  a  penny  per  dollar. 

2.  Purchase  of  bar  gold  in  London,  by  arrange- 


GOLD  SHIPMENTS  igi 

ii.eiit  witli  the  Bank  of  England  to  release  by  cable  the 
equivalent  in  Ottawa  for  shipment  to  New  York: 

Sri>teml|er  J3  I913.-I0,98S.|01  ounces  of  standard  bar 
gold  purchased  at  HOs.  lU,d.  per  ounce  (*t.:3  per  £) 
Uilivery  in  Ottawa  for  shipimnt  to  Xew  York..  £44  0'l     i    ■ 

Interest  at   tl^y,,   for  five  davs   (.Sept.   J.'i-JS)  '  .',7      ,  0 

Interest   at   4it,%  on   fOM-ll-O    (.?l,693.7j  at  4  7irfor 
.seven  days    '     '  _  . 

Total  cost  in  London £iiiuo     i~I 

.Sptemher  38,  191.5.-Paid  bv  the  I'.  S.  Assav »«,uw-  1-5 

.1,  t  ','"''■';  "."n.'l'''";;''''    '.$303,500.00 

'ktoher  5,  1915.— Balance.  less  assay  charges, 

*"•-''    4,693.75 

Net  amount   from   the   V.    S.    .Assay  office 

(being  at  the  rate  of  « 18.94918.'  pur  bunce)  .$208,193  75 
Less  express  charges,  etc 150  05 

c»     ,-  .     ,  •«-'0S,043.70 

hterlmg  equivalent  at  4.71  cable  rate  on  September  28 

'"^"•'o"  • £44,168-14-7 

N^'P™"*   £      119-13-2 

The  Bank  of  England  released  the  bars  at  the  rate  of 
$4..73,  the  net  cost  of  same  delivered  in  Xew  York  was 
$4.7228,  and  the  net  amount  realized  by  the  sale  of  a 
cable  on  London  was  $4..71  per  pound  sterling,  yield- 
ing a  net  profit  on  the  transaction  of  1.28  cents  per 
pound  sterling. 

6.  Gold  imports  during  the  war.— Numerous 
examples  of  gold  shipments  can  be  found  in  any  book 
of  foreign  exchange,  but  the  following  examples  of 
shipments  made  from  London  during  the  year  191.5 
are  of  interest.  It  should  be  noted  in  this  connection, 
that,  notwithstanding  the  abnormal  conditions  pro- 
duced by  the  war,  the  Bank  of  England  has  not  ceased 
to  redeem  its  notes  in  gold;  anyone  holding  Bank  of 


■If  ^ 


zw 


1 


182      DOMESTIC  AND  FOREIGN  EXCHANGE 

England  notes  can  convert  them  into  gold,  and,  if 
willing  to  take  the  risk  of  shipping,  pay  with  them  a 
debt  abroad.  Great  Britain  has  not  yet  found  it 
necessary  to  prohibit  the  export  of  gold  to  neutral 
nations. 

Shipment  of  £100,000  in  sovereigns  from  London  to  New  York: 
.Srplenibrr  i!9,  1913. — Shipped  from  London. 

<niol«T  \i,  191.i.— 9n7„  pilid  l>y  Assay  Office  in  New  York ^(''.VOOO.Oo 

Oiloliir  IS,  1915.-1(1%  piiid  lpy  Assiiy  Office 4»,86T..5:: 

llepresenting  25,(il:».9ri  m..  stundiird  gold  at  iiilS.94.91SJ  per 
ounce    $485^0  ( .  j.i 

Luis : 

Assay  charges   $   57.04 

Interest  Tot  3I^%  for  i;l  davs  on  $4:t5..500 . . . .  S*i:.IO 
Interest  (^  31^7o  for  19  davs  on  ii(t9,Sr>7  53 .  .  .  .  90.83 
Freight  and  insurance. ..." 6,543.83  7,203.99 

*t79,163.54 
Cable  rate  on  Septeinl)er  29th,  4.7314 473,250.00 

Net  profit  on  the  transaction $    4,913.51 

Delivery  of  the  sovereigns  was  taken  by  tale  and  not 
by  weight  from  the  Bank  of  England,  consequently, 
owing  to  the  presence  of  light  sovereigns,  the  ship- 
ment weighed  only  25,613.96  ounces  (instead  of 
2.5,682.18^  ounces  had  they  been  full  weight),  and 
netted  at  the  assay  office  only  $4.85367  per  pound 
sterling  instead  of  $4.86656,  or  a  loss  of  1.289  cents 
per  pound  sterling.  Even  with  tiis  handicap  the 
shipment  netted  a  handsome  profit. 

iThe  difference,  or  remedy  as  it  is  called,  between  the  mint  weight 
(123.274  grains)  and  the  least  permissible  weight  of  the  sovereign  (122.50 
grains)  is  .774  grains  or  roughly  %  per  cent.  Under  normal  conditions 
the  Bank  of  England  seldom  pays  out  sovereigns  averaging  less  than 
256.20  ounces  per  £1.000,  that  is,  .fi218  ounces  or  about  Vt  per  cent  bclmt 
full  mint  weight.  (2.56.S318  — 25fi.20  =  .n3IS.)  The  remcd;  or  variaticiv 
in  weight  on  newly  coined  sovereigns  permitted  to  the  mint  is  .2  grains 


183 


GOLD  SHIPMENTS 

septet"/ 1'  i^f^  '".',??"'„f.;,r  '".""T '?  ^'^  ^'"'■= 

.Sq>.cn,b.r  U.  19,5._B«lanc.e  10%' paid  by -Assay  offlce.- :::  .*  ??.Z','2 
Total  amount  paid  liv  Assnv  nfHtv  f..i.  fi.»     i  i  

^ .;..,  «..^  o.  t^e  ,„;:/  :f^^z^,  --  .^-:.  ;.^;^,^_^^  ,^ 

Assay  chnrprs   j 

Freight  and  insiir ancr  .1' [.[[[[[ *,  J'' ij^ 

"{ol  <^  ■■>!!;%  f'"-  0  'l-'.vs  on  ¥89,0^'  ■(Sc,,t. 

'"(".rt  f  if'^"^^  '""■  "  ''■•'•"' ' ""'  *'  '•'""'•'s      "■** 

i3.Hl  1,196.34 

Net  procfcds  rrreived  In  \cw  York  '    7 " 

£M,61fi-H-l  at  cable  rate  Sept.  1,  m«.' .' ; .■;.■::.';.' *  f -"f!.'*^ 

Net  profit  on  transaction..  Z 

*    4,7G.'i..'i> 

Standard  gold  at  77s.  lid.  per  ot.nce  is  equivalent  to 
.>4.8b394  per  pound  sterling  (378.98364-- 77  917) 
The  proceeds   netted  $4.79148   per  pound   sterling 
which.  With  cable  on  September  1,  at  $4.56.  showed  a 
profit  of  23.148  cents  per  pound  sterling. 

As  a  general  rule,  it  costs  less  to  export  gold  than  to 
import  It  for  the  reason  that  while  in  transit  little  or 
no  expense  for  interest  is  involved  in  the  former  trans- 
action. Exports  occur  when  rates  are  high  and  the 
exporter  can  sell  his  demand  drafts  and  purchase  and 
sli.p  bis  gold  simultaneously,  the  one  practically  off- 
settmg  the  other  on  their  arrival  in  London,  or  "other 
destination.  In  the  case  of  an  import  of  gold,  how- 
ever, the  importer  has  to  pay  for  the  gold  seven  or  ten 

lAltho  the  Royal  mint  Is  ohligrd  bv  law  to  pay  £3  17s    10./,? 


ill 


184      DOxMESTIC  AND  FOREIGN  EXCHANGE 

days  before  he  can  realize  on  the  proceeds  in  Xew 
York.  He  is,  therefore,  obliged  to  forego  the  use  of 
the  amount  while  gold  is  in  transit. 


REVIEW 

When  is  it  necessary  to  export  gold?     When  is  it  imported? 

In  what  forms  arc  gold  shipments  made?  How  do  the  Bank 
of  England  aud  the  United  States  Mint  Assay  Office  at  New 
York  respectively,  buy  coirs? 

Show  how  the  Bank  of  England  relieved  the  New  York  ex- 
change situation  at  the  beginning  of  the  European  war. 

Why  does  it  usually  cost  less  to  export  than  to  import  gold  ? 


CHAPTER  XIV 

STERLING  EXCHANGE 

1.  London  markct.-lt  will  give  a  much  dearer 
under.standmg  of  the  operations  of  forei^  exchange 
..  study  ,n  snu.e  detail  the  principal  exchange  „,ar- 
kets   to  learn  the  exchange  j,ractice  in  each  market 
and  havmg  reviewed  the  principal  financial  centers,  to 
explam  how  exchange  is  effected  with  other  parts  of 
he  world.     It  must  already  be  evident  to  the  reader 
tl.at  m  foreign  exchange  the  London  market  is  domi- 
Ma.it  and  naturally  calls  for  first  consideration.     Xew 
\  ork  wdl  not  of  course,  call  for  special  treatment  at 
tins  pent  as  the  body  of  this  volume  explains  Ameri- 
can exchange  practice.     Special  note,  however,  must 
be  taken  of  the  operations  of  Paris,  Berlin  and  Am- 
sterdam, with  briefer  mention  of  other  centers  and 
comitries  where  exchanges  are  less  highlv  developed, 
llie  insular  position  of  Great  Britain,"  the  density 
«>(  her  population,  the  early  development  of  manu- 
(acturing  enterprises,  the  possession  of  vast  coal  re- 
sources gave  her  at  an  early  date  a  preeminent  position 
i'l  the  worlds  commerce  from  which  she  cannot  be 
easily  dislodged.     With  her  enormous  commerce  and 
her  monetary  system  firmly  and  long  established  upon 
tlie  gold  basis,  she  has  naturally  come  to  occupy  a  sim- 

185 


\-:t 


186      DOMKSTIC  AND  FOREKJN  EXCHANGE 

ilarly  prominent  place  in  tlie  financial  adjustments 
which  international  commerce  renders  a  necessity: 
namely,  in  fnreijrn  exclian^je.  Thus,  the  monetary 
system  of  (ireat  Britain  l)ascd  upon  tlie  poiuid  sterhii^ 
is  more  widely  known  than  any  otiier. 

2.  Munctar;/  si/stcm. — An  understandinjj  of  tin 
monetary  system  of  another  country  is  the  jjrereciiii- 
site  of  any  knowledjje  of  what  exciianjre  procedun 
really  means.  The  illustrations  ff'weu  thruout  this 
volume  will,  however,  dispense  with  the  need  of  any 
extended  discussion  of  Knjilisli  money. 

As  already  stated  the  monetary  unit  is  the  pound 
sterling  represented  hy  a  coin  known  as  the  sovereign, 
which  consists  of  123.27447  grains  of  gold  91fl7-i  fine, 
and  is  thus  the  equivalent  of  113/ii23  grains  or  7.32238.') 
granunes  of  pure  gold.  The  gold  coins  of  common 
circulation  are  the  sovereign  anr'  the  half  sovereign. 
Silver  coins  of  limited  legal  tender  are  in  circulation  in 
denominations  of  1,  2,  2Yi  and  :>  shillings  and  sixpence 
and  threepence  or  K>  and  /i  of  a  shilling.  One  poun<l 
of  standard  silver  (925  fine)  is  coined  into  66  shillings: 
a  shilling,  therefore,  weighs  87.2727  grains  of  standard 
silver  or  80.7272  grains  of  pure  silver.'     Gold  coins  in 

1  British  quotations  for  hnr  silver  are  quoted  so  mnnv  penee  per  niirur 
ttanilnril,  so  «hrn  silver  is  quoted  at  J+IA  penee  per  ounce,  ttie  pou:iil 
standard  costs  i4s.  6<l.  (i'Ol  penee).  wliiel)  divided  by  (ifi  (fives  ttie  iti- 
trin-ie  value  of  ttie  stiilllng  4(^,1  penee.  American  quotations  for  li"r 
silver  are  quoted  so  many  cents  per  ounce  of  pure  rilrer;  tlierefore  l!ii 
I^ondon  quotation  for  bar  silver  at,  say,  i?.5  pence  would  correspond  «i:li 

25  X       _        —  ?7.0":d.  for  1  ounce  of  pure  silver  or  in  .Vmerican  moniy 


!).' 


on  the  basis  of  49„116d.  per  dollar, 


1702- 


--  54.80  cents. 


STKIIMSO  EXCHANGK  137 

ff  .nd  condition  arc  k^u\  teruler  in  CJreat  Britain  to 
any  amount,  silver  coins  to  the  amount  of  £2,  and  cop- 
[urs  to  tlie  amount  of  1  shilling.  When  the  sovereign 
falls  hclow  the  weight  of  V2-2.r,0  grains  it  loses  its 
kfral  tender  quality.  Such  deterioration  of  the  coin- 
ajre  thru  use  is,  however,  rare,  as  the  Bank  of  Eng- 
land under  normal  conditions  issues  no  sovereicns 
which  are  helow  122.970  grawis  in  weight.  This  rule 
promotes  the  retiren)ent  of  light  weight  coins. 

3.  Paper  mot,ef,.~The  Bank  of  England  issues 
notes  m  denominations  of  5,  10.  20,  50,  100,  200,  500 
and  1000  pounds.     These  notes  are  payable  on  de- 
mand at  the  Bank,  and  elsewhere  are  full'legal  tender 
III  effect  they  are  practically  the  equivalent  of  the 
I  nited  States  gold  certificates,  since  all  but  a  small 
portion  of  the  issue  of  the  Bank  (4:18,450,000)  must 
lie  covered  by  gold,  pound  for  pound.     Unlike  the  na- 
tional banks  in  the  United  States,  the  Bank  of  Eng- 
land and  most  foreign  banks,  can  hold  their  gold  in 
the  form  of  foreign  gold  coins.     Hence,  when  gold 
must  be  exported  to  the  United  States  from  foreign 
eountnes,  there  are  large  reserves  of  the  coin  avail- 
al)le  for  the  purpose. 

In  the  United  States,  gold  serves  mainlv  the  pur- 
pose of  bank  reserves  and  very  little  gold"  coin  is  in 

'  ^'^'''Ji^^lt  Vh^'-T'  v""u'  """''''"'  "'^■"  "•"'"■P"^'!  l-r  the  constant 
„  r.K     X?       i-     ,      '^  ^'"'''  "!""•''■«•"♦  "•"lue  per  ounce  of  pure  silver 

fnts  X  A5bJ  =  25  pence.     25  X  2.I9J  =  54.flO  cents. 


!  i 


188      DOMKSTIC  AND  FOHKUIN  KXCUANOK 


1  , 


r 


circulation.  In  Great  Hritain,  on  the  other  hand,  the 
absence  of  any  money  except  Rold  between  the  denom- 
inations of  five  shillings  and  five  pounds  forces  the 
actual  circulation  of  a  considerable  part  of  the  mone- 
tary stock.  In  AuRUst.  1014.  when  there  was  an  un- 
usual strain  on  the  vfold  supply  and  ^reat  difficulty  in 
obtaining  gold  coins  for  current  use,  the  British  Gov- 
ernment issued  Treasury  notes  in  denominations  ol 
£l  and  10  shillings.     These  are  also  legal  tender. 

Outside  of  London  ihere  are  a  few  banks  permitte*! 
to  issue  notes,  a  survival  of  an  oldc-  system  of  bank- 
ing. These  notes  are  generally  of  small  denomina- 
tion, and  as  there  is  a  charge  for  collection  in  liondon. 
their  circulation  is  purely  local. 

4.  Coinage  of  gold— WhWe,  as  we  have  seen,  thr 
exchanges  between  two  different  gold  standard  coun- 
tries are  determined  in  large  part  by  the  relation  of  tln' 
amount  of  pure  gol<l  in  their  respective  coins,  the  mint 
par,  the  shipping  points  for  gold  depend  upon  the 
ease  with  which  the  gold  coin  or  bar  gold  of  one  coun- 
try can  be  made  available  for  payments  in  the  other. 
Hence  the  necessity  of  reckoning  with  the  price  whicli 
is  paid  for  gold  by  the  mint  or  by  the  banks  of  tbi 
other  country  and  the  terms  of  payment. 

Great  Britain  coins  1,869  sovereigns  from  40  li)s. 
troy  of  standard  gold  11/12  fine,  and  the  value  of  an 
ounce  of  standard  gold  is  therefore  £3  17s.  10!li1. 
(77.8746.5  shillings) ;  of  an  ounce  of  pure  gold  £i  4s. 
11.4.';d.  (84.9.5416  shillings) ;  and  an  ounce  of  mint  or 
eagle  gold  .C3  16s.  SVA.  (76.458744  shillings) . 


STi:HLIN(i  KXCHANGK  i«9 

The  Unitetl  States  coins  800  ^old  <lollars  from  43 
iirucs  of  mint  gold  »/lo  fine  and  the  value  of  an  ounce 
Ml'  mmt  or  eagle  gold  as  it  is  called,  is  therefore 
.*!lH.fl04«.>,  of  an  ounce  of  pure  r/nld  $-J0.«71H3.>,  and 
..f  an  ounce  of  ntandard  yold  )til8.»45>l«2.  These  are 
also  the  Canadian  values. 

The  Hank  of  England  pays  immediately  for  gold  at 
the  rate  of  77s.  9d.  per  ounce  standard. 

The  Koyal  mint  in  London  and  its  four  branches  in 
.Melbourne.  Perth.  Sydney  and  Ottawa,  take  anv 
quantity  of  gold  for  coinage,  which  is  free,  but  deliver 
the  corresponding  coins— at  the  rate  of  77s.  lOKd.  per 
.«.  standard— a  fortnight  after  the  receipt  of  the 
jrold. 

The  difference  of  iK-d.  corresponds  to  about  4  per 
cent  interest  for  14  days  on  the  ounce  value. 


fa  ,"^     ..r™"'   '^°"'"*'°"s    tl'^'    B«nk    of   Kngland    pavs 
,  '^.^;''•   P"  °U'«-<-  f">-  staiulani  bar  gold   (,„■  at   tho 

•>+.»(  ly)  but  tliisc  prices  occaMuiiallv  va'v 
On  Augvist  13  1914,  tl.e  an.u.u.ucnenfc  was  made  that  tl,e 
mk  of  ■  ngiand  wa.,  willing  to  purchase  gold  at  Ottawa, 
tl.n.  the  Donun.on  Government,  and  to  p,.v  cash  in  I.on.lon 
■i^amst  snnie  at  the  hxed  price  for  gohl  bars  at  TTs.  (kI.  per 
■"ince  stan<la,d  and  United  States  eagles  at  76s.  Oj-d  nor 
"■'m-e.  It  IS  useful  to  know  l,ow  to  arrive  at  the  equivalent 
'I'  iar  rates. 

In  the  case  of  standard  gold,  divide  $18.949182  bv  the 


I.Diidon  price  per 


'■^.''taisj 


ounce  in  pounds  and  decimals  of  a  pound. 


i.J.a75  ~  —  ^-8901  per  1  pound  sterling  at  £3  i 


7s.  6d.  per 


\ 


If 


190      DOMESTIC  AND  FOREIGN  EXCHANGE 

ounce  standard  gold.  Or  a  rough  calculation  may  be  madi> 
by  adding  .00)26  cent  to  par  ($4.8666)  for  each  half  penny 
decrease  from  77s.  lOM-d. 

+.8666+ (.0026X9)   or  .0234=$4.8900 
For  eagle  or  United  States  mint  gold,  divide  $18.60465  by 
the  price  per  ounce  (£3  —  16  —  O'/^) 

■    '"■^^^     ■    =$4.8932 

or  add  .0027  cent  to  par  for  each  half  penny  decrease  frotn 

76s.  sy.d. 

4.8666  +(10  X  .0027)  or  .027  =  $4.8936. 

5.  Stamps  and  interest. — Illustrations  in  earliei- 
chapters  have  noted  the  fact  that  due  allowance  must 
be  made  for  the  stamp  duties  imposed  by  foreign  coun- 
tries. The  role  that  interest  plays  has  been  fully  dis- 
cussed, but  in  the  actual  work  of  transacting  foreign 
exchanges  an  exact  knowledge  of  interest  usage  is  of 
value. 

The  English  stamp  tax  on  bills  of  exchange 
amounts  to  one  jhilling  for  every  £100,  or  nearly  a 
quarter  of  a  cent  per  pound  ($0.0024) .  In  exchange 
calculations  an  allowance  for  stamps  is  made  of  M;o  of 
1  per  cent.  Checks,  three-day  sight  bills  and  under, 
require  only  a  penny  stamp  no  matter  what  the 
amount. 

In  computing  interest  three  days  of  grace  must 
be  allowed,  the  of  course  such  a  rule  does  not  apply 
to  checks  or  sight  drafts.  Interest  is  calculated  by 
taking  the  exact  number  of  days  and  the  year  at 
365  days. 

6.  How    London    quotes    exchange. — Quotations 


STERLING  EXCHANGE 


191 


on  South  America,  China,  India,  Russia,  Portuga'. 
and  Spain  are  given  in  pence  per  foreign  unit,  while 
!ill  other  countries  are  quoted  in  foreign  money  per 
I)ound  sterling.  Quotations  on  South  Africa,  Aus- 
tralia and  otiier  British  colonies  using  the  pound 
sterling  are  quoted  at  a  discount  or  premium  on 
£100. 

Foreign  exchange  quotations  in  London  are  pub- 
lished in  two  forms: 

(a)  "Foreign  Exchanges"  or  "Rates  of  Ex- 
cliange."  These  rates  are  published  daily  in  the 
London  papers  and  give  the  quotations  for  checks 
and  bills  on  London  obtaining  at  the  various  foreign 
centers,  these  rates  being  cabled  daily  or  oftener  if 
clianges  are  frequent. 

(b)  "Course  of  Exchange"  or  in  "street"  parlance 
On  Change  Table."  The  quotations  are  pub- 
lished every  Wednesday  and  Friday  and  represent 
the  rates  which  English  brokers  pay  for  drafts 
drawn  on  the  various  foreign  centers.  In  other 
words,  "Foreign  Exchanges"  give  the  rates  that  for- 
eijrii  exchange  brokers  are  paying  for  drafts  drawn 
I'ti  foreign  centers. 

'.  Rates  of  E^vchange. —The  following  taken 
from  the  London  Times  of  17th  July,  1914,  is  a  speci- 
men of  the  "Rates  of  F>xchange."  It  generally  ap- 
pears with  two  other  columns  giving  the  quotations 
for  the  two  previous  days.  These  are  replaced  here 
liy  explanatory  remarks: 

XTII— 14 


i 


192      DOMESTIC  AND  FOREIGN  EXCHANGE 

RATES    PAIU    HV    FORKION    CENTERS    FOR    BILLS    ON    LONDON 
CariB cliefk  -^'-   IbM-lT-S-  c.        KrHiicH  au<l  fi-nliirieii  pfr  il 

»rii««ul«— rliMk    ::■•.(.  -iOV.-M'v-      J'i'";'»  "'"l  '■;iii"i>™  i"-'  f- 

Ijcrl,,, Kiiitit  'JUui.   40-jUpf.  Marks  uiiii   itfciiiiifh   \>*T  il 

Ii..rliii— H    liaji     ■JOnl.   ■'•i'/J''  ■)!"''l'»  "'"I   l''''",i"l!«   l"'r  ^ 

Vii.iiiio iiiulit      'JJI".    IC-l'-li  kroiu-ii   nnd   Iwllir   per   il 

A..i»(i  rd.-.n,— Ml!l.t     l-JA-    U>i-l'J'/4C.  Fl.inii»    i.iul    <-"nt«    |..T   il 

Ihilv—hlL'lit  2&L.    26-2T  Lire   and    ci'iils    r-'T   il 

Hwil».Tlu...l-«ight    ■-■St.   l-W-lU'/iC  Krui>.-,  uii.l  J.iil»  LIT  il 

Madrid— »i|!hl     28P    .or,-J'.  1  esflas  to  i  1 

L11.I.011— sicihl     40l,y,r,-'10Vii,d.  IViicc  to   1   iiidreu 

P.-trusrad-!^a    moutlis    ....  sr.r.   10k,  Ii„„l.|™  and  kop.-k«  P-r  ilO 

rc.troSr,.d-.lBl.t     BSr.    7r,-Kr,k.  Roul.l^  and  kopi'ks  pv.  il" 

Cl.risliania     l»kr.  i;:i-^<i    „  !>'»"'■■■  ""'    "■■<■  I'"''  ' 

Copcniiuttcn    l-tkr.   li.lVj-SOVj  kroinT  and  <»,■  |.vr  1 

StorklioJiii  IXkr.   2.1-26  Kroner  and  ore  per  1 

Bomb."   T.  T  1    l/.t  -"-^Cd  ShdliMfs  and   prr,,-.-  ikt   1   rnp... 

Cal"nlla  T    T  1    1/3  "'-td  .Sliillini-s  and  T"riri.  p.'r   1    rn; . .. 

Hona   Konu-  T    T.I    l/lOJd  Sl,imns»  and  penrr  p.  r   I  d.,1  »r 

SI1nneln.1T    Tl    a/.ltd  .S)iillinB»  and   r'lnri-  P'T   1   in; 

S  n«npor.   T    T  1    2/3  l^ed  Slii Minus  and   pMi..-  ,...r   1   dnlNir 

Yokol'nina   T.    T.l    2/o!d.  &liill.ngii  and  p-'iice  per  1  ji-u 

Alojandria      "'Ji'!"-,  PniHtri*    P"   i  1 

Rio  de  Janeiro.  90  dny»  = .  .  l.ll/iod.  J'enee  per  1  niilrcis 

VnlntirniRri     10    davR  -      ...  O'id.  I'eiiee    per    1    peMi 

i'S  Aires     ao'day.::.  .  .17*H,d.  Penee  per  1   peso  or  dollar  (goM. 

Monlevnleo     !"1    davn  2     .     .  .M ':;-d.  Pence   per    1  dollar 

New  York— Cal.le  traiisfers.  l|i4.!-7Vi(t-lViG<;.  Dollars  and  ccnln  lo  il 

1  Teleprapliic  transfer  ,.  ,    . 

2  These   rates  are  telegraphed  on  the  day   preceding   their   receipt. 

Arranged  as  above  the  table  calls  for  little  comment. 

The  reader  should  con.stantly  bear  in  mind  that 
these  rates  are  quoted  in  foreign  markets  for  bills 
drawn  on  London  and  that  in  the  case  of  "movable 
exchange,"  i.  e.,  foreign  money  per  pound  sterling, 
high  rates  are  favorable  to  Great  Britain,  as  more 
foreign  money  is  received  for  a  sovereiLifn  while  low 
rates  are  unfavorable.  :Movable  exchange  in  London 
is  of  course  fixed  exchange  in  the  other  country,  aii<l 
vice  versa. 

In  the  case  of  "fixed  exchange,"  i.  e.,  pence  for 
foreign  money,  the  position  is  reversed  as  the  higliir 
rate  gives  more  })ence  i)cr  foreign  unit  or,  in  other 
words,  less  foreign  money  is  received  for  a  sovereign. 
Fixed  exchange  in  London  is  movable  exchange  in 
the  foreign  country.     The  quotation  $4.80  per  pound 


STERLING  EXCHANGE  193 

is  movable  exchange  in  London  and  fixed  exchange  in 
New  York. 

In  many  instances  it  will  be  noted  that  two  rates 
are  quoted.  The  lower  rate  is  the  buyers'  price  and 
tlie  higher  rate  the  sellers'  price.  The  real  or  trad- 
ing price  is  generally  between  the  two.  The  extent 
of  the  margin  between  the  two  quotations  dei)cnds 
upon  the  volume  of  the  transactions  and  whether  or 
not  the  buyers  or  sellers  are  in  the  majority. 

The  "Foreign  Exchange  Table"  is  the  more  im- 
portant, as  far  more  bills  are  drawn  on  London  than 
London  draws  upon  other  countries.  These  (juota- 
tions  serve  as  a  barometer  of  international  exchange 
and  are  very  closely  watched  by  financial  men. 

In  studying  any  foreign  exchange  quotations  it  is 
well  to  bear  in  mind  the  following  simple  rules: 

Movable  Exchange.  Foreign  money  per  home 
unit.  Buy  high,  sell  low,  the  better  the  biirthe  lower 
tlie  rate,  the  longer  the  currency  the  higher  the  rate. 
Fixed  Exchange.  Home  money  per  foreign  unit. 
Buy  low,  sell  high,  the  better  the  "bill  the  higher  the 
rate,  the  longer  the  currency  the  lower  the  rate. 

8.  Course  of  Exchange.— Every  T  -sday  and 
Thursday,  bankers  and  foreign  exchange  dealers 
meet  at  the  Royal  Exchange  in  London  to  buy  and 
sell  l)ills  drawn  on  foreign  centers  and  on  the  follow- 
ing day  the  papers  publish  the  prices  at  which  bills 
liave  changed  hands. 

The  following  table  is  taken  from  the  Lon^lon 
Times  of  July  17,  1914,  and  as  in  the  case  of  the 


i 


1 


n 


I!    '    :i 

""  rji 


II 


194      DOMESTIC  AND  FOREIGN  EXCHANGE 

Rates  of  Exchange  previous  quotations  have  been 
replaced  by  explanatory  notes. 

COURSE  OP  EXCHANGE 
Showing  R/te8  Paid  by  London   B.AN-KivKa  fob  Bills  Drawn  on  FoREi<iv 

CbM'EBS 

Amsterdam,  etc. — checks.  ..  12  2^12.2'»h  FloriDS  and  stivers  1  per  HI 

Amstrrdam.  etc. — 3  mODths.  12  4'H<-l:i.5l/^  Florma  and  stivers  per  11 

Antwerp  aod  Brusaels 25.50-25.55  Francs  and  cents  i>er  £1 

Hamburg   20  63-20  67  Marks  and  |ifenni|!s  |ier  11 

Berlin,   etc     20  63-20  67  Marks  and  pfennigs  per  11 

Pans — checks    ,  25.171^25.20  Francs  and  cents  per  11 

Paris— 3  months 25  361/4-25  41V4  Francs  and  cents  per  11 

Marseilles — 3  months 25.36>4-25.41>A  Francs  and  cents  per  £1 

Switzerland — 3   months    .  .  .  25.37i<>-25  42i^  Francs  and  cents  per  £1 

Austria — 3  months   .......  24.41-24.45  Kronen  and  liellt-r 

Fetrofcrad    and    Moscow — 3 

months 241^24^4  Pence  to  1  rouble 

Oenoa — 3    months    2.5. 561^-25. 61Vi  Lire  and  cents  i>er  il 

Kew    York — 60    days     ...  4i(lh6-4'">i6  Pence  per  »1 

Madrid — 3  months   4o^^t]-4r)%e  Pence  per  5  pesetas 

LisliOD — 3   months    45^ie-45t>^«  Pence  per  1  milreis 

Oporto — 3   months 4.5»ifl-45i-'Vifl  Pence  per  1  milreis 

Copenhagen — 3  months    ..  .  l-*.4'*-l'*  52  Kroner  and  ore  per  ll 

Christiania — 3  months   ....  1m.4S-1.^  52  Kroner  and  ore  [ler  11 

Stockholm — 3    months    ....  IM. 48-18. 52  Kroner  and  ore  per  1.1 

1  One  florin  ,=  20  stivers. 

It  will  be  noted  that  these  rates  are  closely  in  sym- 
pathy with  those  given  in  the  above  Foreign  Ex- 
change Table  and  represent  the  price  that  London 
was  willing  to  pay  for  bills  on  these  centers. 

With  one  or  two  minor  exceptions  the  quotations 
conform  to  those  in  the  summarj'  of  Foreign  Ex- 
changes. This  table,  however,  is  dated  before  tlie 
European  war  which  commenced  in  August,  1914. 
Since  then  the  discrepancies  have  apparently  disa])- 
peared  and  the  quotations  in  the  two  tables  are  now 
practically  uniform.  New  York  and  Spain  are  now 
quoted  in  foreign  units  per  pound  sterling  instead  of 
pence  per  foreign  unit.  Russia  is  quoted  in  roubles 
per  £W,  and  Holland  in  florins  and  cents  instead  '*' 
florins  and  stivers. 


STERLIXG  EXCHANGE  195 

Where  two  rates  are  quoted  for  long  bills  ,n  the 
Course  of  Exchange  the  better  price  is  for  bank- 
ers bills  and  the  lower  price  for  ordinary  commercial 

lulls. 

The  short  or  check  rate  refers  not  onlv  to  checks 
and  demand  item,  but  also  to  bills  payable  at  eight 
-lays  or  less.     When  two  rates  are  (,uoted  for  checks, 
the  better  rate  is  for  demand  items  and  the  lower 
rate  for  short  date   bills.     .Movable   exchange   rate 
or  long  paper  is  quoted  higher  than  short  exchange- 
m  other  words,  nv,re  foreign  monev  will  be  received 
tor  a  sovereign  it  payment  in  the  foreign  country  is 
deferred  thirty  or  sixty  days,  whereas,  the  rev;rse 
is  true   of   fixed    exchange    quotations,    the    longer 
the  payment  is  deferred  the  less  the   foreign  unit 
costs.  " 

!).  American  quotations.-Sterhng  rates  are  quoted 
in  he  United  States  and  Canada  at  so  many  dollars 
and  cents  to  the  pound  sterling,  $4.85,  $4.8«'/.  and 
so  on.  There  are  two  methods  of  progression; 
namely,  advancing  by  eighths  of  a  cent  $4.8J,  ,$4  8.Vs 
' -1.80/4,  and  advancing  by  five  one-hundredths  of  a 
cent  per  pound  (.05  cent),  $4.8510,  $4.8515,  $4.8.550 
and  so  on.  The  latter  is,  of  course,  the  closer  .Rota- 
tion and  IS  used  in  market  transactions. 

10.  Convemon.~ln   actual    practice    conversions 
are  generally  made  with  the  aid  of  exchange  tables 
but  every  operator  should  be  able  to  make  the  neces- 
!*ary  calculations  for  himself. 

Sterling  currency  is  non-decimal: 


il 


■  ! 


i 


196      DOMESTIC  AND  FOREIGN  EXCHANGE 

£l  =  20  shillings  =  24C  pence  =  9fi0  farthings 
.05  =  1  shilling  =  12  pence  =  48  farth'  .s 
,004.'/(,  =  1  pence  —      4  farthings 

It  will  he  found  more  convenient  for  purposes  of 

calculation  to  reduce  all  shillings  and  pence  to  the 

decimal  of  a  pound. 

To  rccJiict;  shillings  and  pence  to  the  decimal  of  a  pound, 
niultii)ly  the  siiillings  by  .05,  and  the  pence  by  .0041^.     The 
reason  of  this  is  apparent. 
£1  =  1. 

Is  =  .05  of  a  pound. 
Id  =  .004166  of  a  pound  or  .004%. 
If  only  an  approximation  to  the  nearest  penny  is  desired, 
multiply   the  pence  by  .004,  and  add  one  to  the  result  if 
over  twelve,  and  two  if  over  thirty-two. 
Example: 

Reduce  £15.  8s.  7d.  to  pounds  and  decimal : — 

15 £15.00 

.05x8    40 

.004'/ux7 029;,, 

£15.429',,; 

To  reduce  decimals  of  a  pound   to  shillings   and  pence, 

divide  the  first  two  numbers  by  five  for  the  shillings,  and  the 

remainder  by  four   for  the  pence   (to   be  exact,  divide  by 

.004%)  or  -^ 

The  following  table  will  be  found  useful: 

Shillings        £      Shillings        £  Pence  £  Ponce  £ 

1  .0.5  II  .55  1  .00410  11  .M5SS 

2  .10         ij         .60  a         .ooKia     *    12         .05000 

3  .15  13  .65  3  .01J.50  1^3  .0001:1 

4  .-'0  1+  .70  4  .01666  V,o  .000.1(1 

5  .25  li  .75  5  .030S3  %.,  .OOOli!) 

6  .30  IG  .«0  fi  .02500  ij'  .000.53 

7  .35  17  .«5  7  .fli?916  14  .00101 

8  .40  18  .90  8  .03333  %  .OO.'OS 

9  .45  19  .95  9  .0;)750  %  .0031 J 
10  .50  30  1.  10  .04166 


STERLING  EXCHANGE 


197 


The  niles  for  conversion  are 

English  money  into  clollars :  Multiply  the  amount  in  pounds 
by  the  rate  per  pound. 

£2,500  at  4.8635  -=  2,500  X  4.8635  =  $12,158.75 

Dollars  into  English  money:  Divide  the  amount  in  dollars 
by  ttie  rate  per  pound. 

$2,500  at  4.8635  --.  -J^^.     =  £514.0331  =  £514.  0.  8. 

Since  £15  is  equal  to  $73  at  par  ($4.8666),  sterling 
amounts  may  be  converted  into  dollars  at  par  bv  multiplying 
by  'vi.-,  and  dollar  amounts  may  be  converted"  into  pounds 
sterling  at  par  by  multiplying  by  '%.,. 

11.  Profits.— When  a  profit  of  so  much  per  pound 
IS  desired,  no  calculation  is  necessarj-.  A  cent  ad- 
vance per  pound  means  one  dollar  per  £lO()  or  ten 
dollars  per  £1,000;  a  point  advance  per  pound  (.01 
cent)  gives  ten  cents  on  £1,000  and  five  points  (.05 
cent)  per  pound  means  a  profit  of  .50  cents  per 
£1,000.  One  eighth  of  a  cent  advance  gives  1214 
cents  per  £lOO. 

When  the  profit  is  figured  on  the  dollar  value  it 
will  be,  roughly,  double  the  advance  in  the  rate 
(4.87  X  2,  or  double  the  value  of  a  pound,  being 
nearly  $10).  An  advance  of  five  points  means  a 
profit  of  lOM  cents  per  $1,000,  and  an  advance  of 
fifty  points  (say  .$4.8.500  to  $4.8.550)  gives  a  profit  of 
only  $1 .03  per  $1 ,000.  One-eighth  of  a  cent  advance 
means  a  profit  of  26  cents  per  1,000. 

On  ordinary  transactions  a  profit  of  one-eighth  to 
one-quarter  of  1  per  cent  should  be  made,  or  from 
sixty  points  to  a  cent  and  a  quarter  a  pound,  accord- 
ing to  the  nature  and  amount  of  the  transaction.    On 


■  '■'•■a 
,'  M 


Im 


198      DOMESTIC  AND  FOREIGN  EXCHANGE 

small  transactions  two  or  three  cents  per  pound 
should  be  charged  in  order  to  obtain  a  minimum. 

12.  Purchase  of  bills  of  wc/tangre.— Practically 
all  exchange  business  in  sterling  is  transacted  by 
cable  or  bv  demand  and  sixty-day  bills,  and  quota- 
tions are  "generally  furnished  accordingly.  Occa- 
sionally, however,  it  is  necessary  to  make  a  quota- 
tion cm  some  special  dating,  such  as  30  or  90  days, 
and  examples  are  therefore  given  below. 

Making  the  allowances  for  stamps  already  nott.l 
and  calculating  interest  at  the  appropriate  rate  the 
following  table  will  be  found  serviceable: 


STERLING  EXCHANGE  INTEREST 
TABLE  FOR  USE  IN  PURCHASING  BILLS  OF  EXCHANGE 


Katea 
Per  Cent 


Baala- 

1/16  _ 

l/8_ 

V*- 


l/«- 

8/4- 
1*- 

i*- 

3«_ 


1486. 


6*- 


.008 
.006 
.010 


.080 
.040 

.060 
.180 
.160 


1486. 


.008 
.017 


006 
.100 


.864 


1486. 


.(SI 
.066 

.110 

.819 
38) 
.438 

.8n 

L316 
1.7S4 

2.1S8 
8.631 


(486. 


.068 
.106 
.809 


1.674 
8.611 


4.186 
6.083 


<486. 


.061 

.un 

.843 

.486 

.788 
.970 

1.940 
8.910 


4.860 
5.880 


f486. 


.077 
.164 


.618 
.987 
.836 

8.4.'8 
3.707 
4.943 

6.179 
7.416 


133  Osrii 


(486. 


.108 
.804 
.409 


3.20s; 
4.90:1 


8.172 

9.807 


-   The  above  te»re.  .re  cUtutoted  oa  the  to.!,  of  (M  per  iilllO  .ua  36S  0.7.  per  »e.r. 
Stunia  one  MitUinK  per  £100  or  1/20  of  1>. 


STERLING  EXCHANGE  199 

Examples  showiriK  how  the  rates  for  different 
kinds  of  bills  are  calculated  (as  a  matter  of  conven- 
ience the  calculations  are  based  on  =£100), 

What  price  can  be  paid  for : — 

(A)  CommcTcial  bill  on  London,  draft  drawn 
payable  three  days  after  sight,  no  docu- 
ments attached  ("Clean  Bill")? 

New  York  rate  for  demand  check  on  Lon- 

^''"  $487.00 

Stamp  duty  (Id.)  not  figured 00 

Discount  6  days,  3%    (private  rate)  24  .24 

$486.76 
.Nearest  commercial  rate $4.8673 

(B)  Sixty-day  sight  draft  on  London  Bank, 
documents  against  acceptance? 

New  York  rate  for  demand  check  on  Lon- 

i°"  $487.00 

Discount    63  days,  3>/4%    $2.93 

Stamp  duty,  K-o^" 24         3.17 

$483.83 
Nearest  commercial  rate $4.8386 

(C)  Ten-days  sight  draft  on  a  merchant,  docu- 
ments deliverable  against  acceptance.' 
New  York  rate  for  demand  check  on  Lon- 

i°"  $487.00 

Discount,  13  days,  S%'/, 66 

Stamp  duty,  K'o7' 24  .90 

$486.10 

Nearest  commercial  rate $4.8610 

(0)  Sixty-days  sight  draft  drawn  on  a  mer- 

chant, documents  deliverable  against  pay- 
ment, covering  a  shipment  of  perishable 
goods.' 


ii 


200      DOMESTIC  AND  FOREIGN  EXCHANGE 

Ni'w  York  rale  for  dcinand  check  on  Lon- 
don $487.00 
Kcliri'incnt    rate    of    discount    at    wliich 
drnft  may  be  retired  at  option  of  drawee 
under  rebate. 

(53  days,  .'J'/ .ta.JjS 

Stamp  duty,  Vm «■*         S.TC 

Nearest  conimereial  rate $-t.84y.'> 

In  Canada  the  above  calculations  would  be  affected 
by  the  di-scount  or  premium  on  New  York  funds.  In 
the  last  example  if  New  York  funds  had  been  at  '.;i 
of  1  per  cent  discount  it  would  have  been  necessary  to 
have  deducted  23  cents  and  the  Montreal  rate  for  a 
sixty-day  draft  would  have  been  $4.84.  y32  premium 
would  have  made  the  rate  $4.8440. 

REViEW 

How  does  ttie  Bank  of  England,  as  well  as  most  foreign  bankii. 
differ  from  natiomil  banks  in  tbe  United  States  witli  resptx-l  to 
gold  reserves?     What  advantage  is  gained  thereby? 

How  are  exelianges  quoted  on  London,  in  what  forms  are  they 
published  and  when? 

What  is  the  value  of  a  foreign  exchange  table?  What  ruliv 
should  be  borne  in  mind  when  studying  it? 

How  are  sterling  rates  quoted  in  the  United  States  and  Can- 
ada?    What  method  of  progression  is  usually  followed  and  why; 

How  are  profits  figured  on  the  dollar  value? 


M    :      '  i 


CHAPTKH  XV 


FRENCH  EXCHANGE 

1.  Paris  marhcl.-^l„  rrar.ce.  the  financial  center 
s  I  ar,.s  an,l  all  exelmn^.e  is  c,,H.te,l  in  Paris.  As  a 
trading  center  I'aris  is  not  so  i„.p„rtant  in  c  .„n,„ri" 

■th  Kn^.l,sh  c,t,es.     «ut  as  an   investn.ent   center 
Par.s  far  outstrips  the  other  cities,  an.l  this  gi." 
.ts  importance  in  the  financial  world 

2.  Latin  Union.~In  many  respects  the  French 

r  t^r'tr  '■"^'"'""  *''"*  '"■  *'-  ^^"ited  States' 
l.e  standard  has  come  to  be  «ol,l.  but  in  circulation 
tlere  .s  a  lar^e  amount  of  silver  (five-franc  ece  ) 
jv  ,ch  .s  accepted,  under  the  law,  as  unlin.ite!  e;  , 
tender.     Prance  is  the  chief  n.en.ber  of  the  T  •.tin 

JHi^riiini,  Italy  and  Sw  tzerhn.l      rv         i 

,,.,,.1.    f  •.  .  ""ii/;eiian(i.     irreece  became  a 

part  of  it  two  years  ]»ipr      im,    i  •      , 

I.  vears  later.      1  (m  known  in  the  resnpp 

^..H.nt.,es  by  difl^rcnt  names  the  coins  of  :,nS. 
ul  have  le^.al  currency  thn.out  the  T^nion.     Other 

'"e  Latin  Lnion  thru  any  monetary  treaties. 

207 


cox     DOMESTIC  AND  FOREIGN  EXCHANGE 


The  orij?innl  treaty  of  the  Latin  Union  contem- 
plated a  bimetallic  system  of  currency,  but  sson  after 
the  Union  was  founded  the  free  coinage  of  silver  was 
suspended,  but  not  before  a  large  quantity  of  full 
legal  tender  five-franc  pieces  had  been  coined  and  put 
into  circulation.  The  continued  coinage  of  gold,  how- 
ever, has  reduced  this  silver  money  to  a  subordinate 
position. 

8.  Monetary  syntem.—Th*:  unit  of  the  French 
monetary  system  is  the  franc  of  .3'2'i.iH  grammes  0()() 
fine,  equivalent  to  .290822  granmies  of  pure  gold.  In 
the  gold  coinage  it  is  represented  by  its  nmltiples  .5, 
10,  20,  50,  and  100  francs,  tho  coins  above  20  francs 
are  rarely  seen.  The  napoleon  or  twenty-franc  piece 
may  be  regarded  as  the  standard  gold  coin. 

A  kilo  of  mint  gold  900  fine  is  coined  into  1.55  na- 
poleons or  20  franc  pieces  or  8100  francs.  It  follows 
that  the  value  of  1  kilo  of  fine  gold  =  -^  X  8100  or 
fcs.  8444.444,  and  a  franc  contains  .290322  grammes 
of  fine  gold.  France  has  only  one  mint,  situated  in 
Paris,  which  pays  at  the  rate  of  fcs.  8437  for  one 
kilo  of  fine  gold  for  coinage,  arrived  at  as  follows: 

Value  of  ]  kilo  of  mint  gold  900  fine. Fcs.  3100. 
Less  mint  charges  per  kilo 6.70 


The  value  of  one  kilo  of  fine  gold  ^  3<»3.^  »  »_  Ycs. 


8487. 


The  Bank  of  France  will  purchase  British  gold 


FRENCH  EXCHANGE  S03 

...in  at  tlie  rate  ..f  3140.0068  fcs.  per  kilo;  and  Aus- 
trian,  Gerrimn.  Russian  and  American  coin  «t  Fcs 
a090.5504  per  kilo. 

The  silver  five-franc  piece  weighs  25  ^ammes  900 
fine  and  contains  22.3  Kranmies  of  pure  silver.  In 
addition  to  the  five-franc  piece  there  are  silver  coins  of 
t»<,  francs,  one  franc,  and  50  centimes  or  one-half 
Iranc.  with  minor  coins  in  nickel  and  hronze.  The 
.Sliver  coins  are  exact  suhdivisions  hv  weiKht  of  the 
hve-franc  jiiece  !)iit  as  the  fineness  of  these  coins  is 
"Illy  8.35,  there  is  less  pure  silver  in  five  one-franc 
pieces  than  in  the  five-franc  piece.  Smaller  coins 
tlian  five  francs  are  limited  in  amount  to  7  francs  per 
licad  of  the  population.  Unlike  the  five-franc  pieces, 
they  have  not  unlimited  legal  tender. 

Paper  money  is  issued  only  by  the  Bank  of  France 
ill  notps  of  50,  100,  500  and  1,000  francs. 

4.  atamp  duties  and  interest.— Them  is  a  lax  of 
till  centimes  on  checks  payable  in  the  town  in  which 
they  are  drawn  and  of  twenty  centimes  if  payable 
elsewhere.  Bills  of  exchange  are  taxed  five  centimes 
per  fcs.  100  or  fraction.  For  quotation  purposes 
stamp  duties  are  reckoned  as  20  centimes  or  !:„  of  1 
in-v  cent  on  $100  or  P'cs.  520. 

The  law  requires  a  check  to  be  paid  within  eight 
(lays  from  the  date  of  issue;  otherwise  it  is  consid- 
ered as  a  bill  of  exchange.  As  figures  can  be  easily 
changed  the  law  requires  the  date  to  be  written  in 
Words. 

Quotations  for  time  bills  drawn  on  France  are  ar- 


i  \ 


204     DOMESTIC  AND  FOREIGN  EXCHANGE 

rived  at  by  adding  the  interest  and  stamps  lo  the  de- 
mand rate.  The  interest  is  calculated  on  a  basis  of 
Fes.  ">20  equals  $100.  There  are  no  days  of  grace, 
and  interest  is  computed  on  the  basis  of  300  days  to 
the  year.  The  following  rules  will  be  helpful  in  de- 
termining the  rate  of  interest  which  is  applicable: 

Documentary  payment  bills  can  be  discounted  with  banks 
at  the  Bank  of  France  rate. 

Documentary  acceptance  I'ills  are  usually  subject  to  dis- 
count at  the  Bank  cf  France  rate  for  the  last  Hve  <iays  and 
at  the  private  discount  rate  for  the  balance  of  the  time. 

Discountable  bills  on  first-class  commercial  firms  are  <lis- 
countcd  at  the  open  market  rate. 

A  reduction  in  the  discount  rate  of  the  Bank  of  Fraiici 
produces  a  fall  in  the  London  price  of  long  bills  on  Paris 
and  also  i)roduces  a  rise  in  French  exchange. 

Drafts  on  French  banks  are  debited  to  the  account  on  n  - 
ccipt  of  the  relative  advices.  Interest  on  the  amounts  of 
drafts  not  promptly  presented  is  therefore  a  source  of  rev- 
enue to  the  French  bank. 

Overdr.ifts  in  F'rcnch  accounts  are  expensive,  as  the  rate 
of  interest  on  debit  balances  is  usually  greater  than  in  tli( 
case  of  any  other  i^uropean  account. 

French  bankers  usually  charge  an  extra  commission  fur 
telegraphic  transfers  to  firms  or  persons  not  cla.ssificd  as 
bankers. 

5.  How  Paris  quotes  exchange. — The  usage  in 
French  quotations  is  to  give  the  value  of  the  foreign 
money  in  francs.  For  this  purpose  100  units  of  tl>e 
foreign  money  are  taken  as  the  basis  except  in  tlie 
case  of  the  pound  sterling  when  a  single  pound  is 
used.  On  a  sight  or  check  basis  the  quotations  are  as 
follows : 


FRENCH  EXCHANGE  205 

London 25.13  francs  jx-r  1   £ 

Germany   1^3%  "  "  l,),)  ,„arks 

LatmUn.on...       ggl-ic  "  "  100  francs 

"°"»"'l 208!,  "  "  ,.<,  .,^,i„^ 

K"***"" 264'i  "  .  ,00  ,„ubi.., 

^"■'*'""  , 10^;^i«  "  ••  -00  cro«,u 

New  York 517 '/l-  «  '  ;,V)  Joll.-.rs 

6.  French  exchange  in  New  York.~{a)  Quota- 
tions at  so  many  cents  to  the  franc  are  used  only  in 
minor  exchange  operations  and  (h-afts  drawn  on  small 
French  towns.  The  conversions  in  this  case  resolve 
themselves  into  simple  prohlems  in  multiplication  or 
division. 

(b)  PVanc  quotations— So  many  francs  to  the  dol- 
lar are  the  reverse  of  all  the  usual  exchange  quota- 
tions, so  that  a  higher  rate  means  cheaper  or  lower 
exchange;  i.e.,  more  francs  are  received  for  the  dollar. 

Thus  :— 

$1,000     at  5.18'/N  will  purchase.  ..  .Fes    5181  05 
.'i<998.80  at  .5.18';4  will  purchase.  ..  .Fes.  5181.25 

Franc  quotations  advance  fs  of  a  centime  per  dol- 
lar or  about  >,s  of  a  cent  per  franc.  It  will  also  be 
noticed  that  the  advance  of  %  of  a  centime  in  the 
above  illustration  corresponds  roughly  to  a  decrease 
"f  !s  of  1  per  cent  in  the  dollar  value. 

For  an  ordinary  transaction  this  advance  of  Ys  of  a 
centime  is  sufficient,  but  in  large  transactions  where 
tlie  quotations  are  necessarily  close,  the  ".shading"  is 
yilVcted  by  increasing  or  decreasing  the  quotation  by 
'm  of  I  per  cent,  etc.  This  plus  or-nnnus  fraction 
does  not,  however,  apply  directly  to  the  rate,  !)ut 


206     DOMESTIC  AND  FOREIGN  EXCHANGE 

means  Vm  or  Vj2  of  1  per  cent,  etc.,  on  the  amount  of 
dollars  converted  at  the  rate  of  518/s  or  520  as  the 
case  may  be. 

Francs  into  Dollars  rt  a  Fractional  Rate: 

Fes.  1,000  at  5.18'/k  equals $193.0037 

Fes.  1,000  at  5.18'/8  plus  \{h   193.0037 

plus  %4  of  17c   ....  .0301 

equals .$193.0338 

A  plus  fraction  makes  the  francs  cost  more. 
A  minus  fraction  makes  the  francs  cosi  less. 
Dollars  into  Francs  at  a  Fractional  Kate: 

$1,000  at  5.18%  equals Fes.  .5181.25 

$1,000  at  5.18ys  plus  Vm   Fes.  5181.25 

less  ^;4  of  V'/o  of  itself .81 

(■((uals    Fes.  5180.4-t 

%4  of  1'/  of  $1,000  is  .15/N  cents  which  at  the  abovf 
rate  equals  81  centimes,  to  be  deducted  from  the  franc  amount 
as  above. 

A  plus  fraction  decreases  the  number  of  francs  received. 
A  minus  fraction  increases  the  number  of  franc    rcceive<l. 

7.  Fractional  quotations. — It  mu.st  always  be  borne 
in  mind  that  the  fraction  (plus  or  minus)  refers  to 
the  dollar  amount  only  in  any  exchange  quotation,  ii 
plus  fraction  makes  francs  (or  marks  or  florins)  cost 
more  dollars,  a  minus  fraction  makes  francs  (or  marks 
or  florins)  cost  less  dollars. 

This,  at  first  sight,  may  appear  to  be  complicated, 
but  a  little  practical  experience  and  the  assistance  of 
the  following  table  should  make  it  quite  clear. 

Francs  Dollars 

520        plus           %:     5.19837  5i30  plus          %.>     .19^367 

520         plus           y^     S19919  520  plus           1(^     .192a37 

S20                                 4.20  ii*  .192307 


FRExXCH  E 

^20       minus 
S-'O       minus 
i-'O       minus 

Frftnos 
Vm  i--'0081 
l/4a  5.201 82 
%4     S.2nj43 

5.23125 

k '«       _        *11      1 

207 


520 

520       minus 

•5211       minus 

52:)U 


DollHrs 
.192277 
%!•    .I»2247 
9i4    .11)2217 
.1911589 


From  the  above  it  will  be  noticed  that  %4  makes  a 
difference  of  .000030  in  the  dollars,  and  .00081  in  the 
francs  column,  'xhe  rate  520-%,  decreases  the 
value  of  the  francs  over  the  520  rate  bv  .000030  to 

.00081  to  Pes.  5.20081. 

The  above,  or  any  franc  exchange  table,  will  show 
at  a  glance  how  the  dollar  value  decreases  as  the  franc 
value  increases,  the  franc  at  520  being  worth  19.2307 
cents,  while  at  523-.  it  is  worth  only  19.1158  cents. 
The  effect  of  the  fractional  shadings  should  also  be 
studied  until  they  are  fully  understood.  As  pointed 
out  above  the  fraction  refers  to  the  dollar  amount 
only;  it  can  be  applied  to  the  franc  quotation,  however, 
it  the  sign  is  reversed. 


Thus    Fes.    1000.   at  5.20  =  V^  = 

If  the  rate  was  5.20  +  %4  add''^,  „f  1%  „f  ^jg.r^-,  ^ 

fonn         ™"  ^■-0  =  ^-19919  -nil  proceeiii„i,  ." 
;ii)ovc 


$192,307 

.030 

$I!H.3;)7 


3.19919  «I»2.237 

8.  Profits.— When  the  rate  is  quoted  at  so  many 
'''""*  xvlilil'"''"^'  ""^  advance  in  the  rate  of  one-hun- 


tll 


208      DOMESTIC  AND  FOREIGN  EXCHANGE 

dredths  of  a  cent  (.01  cent)  would  of  course  mean  one 
cent  profit  on  Fes.  100,  or  ten  cents  on  Fes.  1,000. 
The  rule  is  to  buy  low  and  sell  high. 

Fes.  1,000  at  .193  would  cost  $193,  and  if  sold  at 
.1935  would  realize  $193.50,  a  profit  of  50  cents  or 
nearly  V*  of  1  per  cent.  An  advance  of  .01  cent  in 
selling  corresponds  to  a  profit  of  about  fifty  cents 
per  $1,000  or  !4o  of  1  per  cent.  $1,000  would  pur- 
chase Fes.  5,181.35  at  .193,  but  at  .1935  $1,000  would 
purchase  only  Fes.  5,167.96,  a  difference  of  Fes.  13.3!) 
or  $2.54,  representing  V*  of  1  per  cent  profit  on  $1,000. 
When  franc  quotations  are  used,  a  difference  in  the 
rate  of  %  centime  (.625  centime)  corresponds  ap- 
proximately to  Vh  of  1  per  cent  on  the  dollar  value  or 
12y2  cents  per  $100.  The  rule  is  to  buy  high  and  sell 
low.  Fes.  1,000  purchased  at  5.15^)*  would  cost 
$193.94,  and  if  sold  at  5.15  would  realize  $194.17,  a 
profit  of  23  cents,  or  Vs  of  1  per  cent  on  $193.94.  11 
sold  at  5.15^'s  +  He,  $194.06  would  be  paid  (103.94  - 
.12),  and  the  profit  reduced  to  /la  of  1  per  cent. 
$1,000  at  5.15's  would  purchase  Fes.  5,156.25,  but 
$1,000  would  purchase  only  Fes.  5,150  at  5.15,  a  dif- 
ference of  Fes.  6.25  or  $1.25.  representing  a  profit 
of  '/i  of  1  per  cent  on  $1,000.  If  the  rate  was  S.l.j'^ 
+  %2,  the  draft  would  be  for  Fes.  5,154.63  or  Fes. 
1.61  (3114  cents)  profit. 

The  profit  on  bills  of  exchange  is  always  figured  on 
the  rate,  not  on  the  amount,  as  illustrated  in  the  fol- 
lowing example: 

What  price  should  be  paid  for  a  sixty-day  bill  on  Paris, 


FRENCH  EXCHANGE  ao9 

check  rate  SA5-;„  discount  rate  3  per  cent,  to  realize  a  profit 
of  'A  of  1  per  cent? 

Check   rate    .513.625 

Interest  Q'/, ,  60  diiys.  .2.60 

Stamp  K'(( 26 

Profit '4of  I'/c 1.29         4.15 

„r5iq.v.v  519.775  or  5.20  + '/e* 

or  .^.  i!;/.s-/()4. 

9.  Purchase  of  French  long  bills.~The  sifiht  rate 
1.S  the  ba.sis  from  which  the  rates  for  lon^  bills  are  cal- 
culated in  New  York.  It  should  be  carefully  noted 
that,  as  the  quotation  is  given  at  so  many  francs  to  the 
dollar,  allowances  for  interest,  stamp  duty,  etc., 
should  be  added  to  the  sight  rate. 

When  quoted  rates  are  supplemented  bv  fractional 
quotations,  it  is  necessary  to  take  these  fractions  into 
consideration  in  calculating  the  rates  to  be  paid  for 
bills,  as  follows: 

^w'tinT  If  minus,  add  If  plus.dcluot 

'"  "*'*^  tnun  r;itt.' 

%4%  Fes.  .00081  Fes.   .00081 

732%  "     .00162  "     .00162 

%4  7<'  "     .002 1.3  "      oo'Hfj 

Mg%  "     .00324  "     .00324 

Calculation  can  be  simplified  by  the  use  of  the  fol- 
lowing French  Exchange  Interest  Table: 

''8  -"O^  .009  o>-  054  n«i 

]i  .Wl  .038  .108  ..217  .  « 

M  .022  .072  .217  .4.13  .bio 


^10      DOMESTIC  AND  FOREIGN  EXCHANGE 

Rate  3  days'  10  days'  30  days'  60  days'  90daj, 

pfrc^t  .ight  »ight  ^  sight  ».gl.t  s,ght 

•liasis     Fes.  WO  SM     ^  4^0  iiO  *-«> 

;i,  ():(.>  .108  .:i-'j  -"'O  ■«" 

\  ()43  lU  .4:w  •««?  1*"' 

3  '087  .289  .807  1.73:t  S.IHIO 

,  IW  .433  1.300  i.600  3.9(10 

I  "173  .578  1.733  3.4«7  J.-'On 

T  .117  ^■iJ  ^-lu'  *■*'■*  ''•""' 

6  "itiO  .81)7  i.OOO  S.JOO  7,800 

Stamps  .i«  •-'«  -'«  •^''  -"' 

The  above  figures  are  calculated  on  the  basis  of  $100  beirn; 
equal  to  SaO  francs  and  360  days  per  year. 

Example  1,  Paris  ciieck  rate  in  New  York  is  5.18/s,  Hank 
of  France  discount  rate  3  per  cent,  find  the  rate  for  60-day 
bills.  For  convenience  the  calculation  is  made  on  the  basi, 
of  $100. 

Check  rate   518.125 

Add  ^  ■■ 

Stamp  duty  V-o  of  1% 26 

Interest  60  days  at  S^c  .  .  .   2.60  2.86 

520.985 
or  5.2iy4  +  %4  arrived  at  as  follows:  520.985  =  521.25  - 
00.265,  but  Fes.  .243  is  equivalent  to  %4,  and  reversing  tlio 
minus  sign  the  quotation  reads  5.21^4  +  'Kw. 

Example  2,  Paris  check  rate  in  New  York  is  5.18'/»-',i4. 
Bank  rate  3  per  cent,  find  tlie  rate  for  60-day  bills. 

Check  rate   518.125 

%40fl% ^ 

(5.18%-%4)   518-206 

Add 

Interest  at  S"/" 2.60 

Stamps  !-20  of  i^fc 26  2.86 

521.066 

or  5.2l!4  +  I'x:^  (521.25  -  .162  or  V^-^  =  521.088). 


FRENCH  EXCHANGE 


an 


In  Canada  the  calculations  would  of  course  be  af- 
fected by  the  discount  or  premium  on  New  York 
funds;  in  the  above  example  (i>18!»  —  !(i4)  a  premium 
cm  New  York  funds  of  /in  would  make  the  rate  .?18',» 
and  a  discount  of  Vm  would  make  it  518!^  —  '^2. 

REVIEW 

What  monetnry  system  was  cstablislird  bv  tlio  Latin  Union? 
What  system  did  the  original  treaty  contemplate? 

How  is  exclianjje  quoted  in  Paris?  How  do  franc  quotations 
advance  in  ordinary  transactions  and  in  large  transactions? 

Discuss  fractional  quotations. 

How  is  profit  on  bills  of  exchange  figured?     Give  an  example. 

What  is  the  basis  from  which  rates  for  long  bills  are  calculated 
in  New  York  ? 


I 


CHAPTER  XVI 


GERMAN  EXCHANGE 


1.  The  Berlin  market. — In  recent  years,  the  ex- 
change market  in  IJerlin  has  become  of  the  lii-st  im- 
portance. This  is  due  to  tlie  remari<al)le  expansion 
of  German  foreign  trade,  and  the  considerable  devel- 
opment of  German  branch  banking  thruout  the  world. 
The  former  glory  of  Frankfurt  as  the  financial  cen- 
ter of  northern  Germany  has  paled  before  the  ascend- 
ancy of  Berlin. 

2.  Money. — The  monetary  system  of  the  German 
Empire  as  respects  the  use  of  gold  and  silver  is  not 
so  exclusively  gold  as  that  of  the  United  Kingdom, 
nor  is  it  charged  with  so  much  silver  as  that  of 
France.  With  the  gold  standard  there  are  vestiges 
of  the  former  silver  standard  in  the  form  of  the  thaler, 
but  these  are  not  nearly  so  numerous  as  the  five-franc 
piece  in  France,  and  are,  moreover,  being  withdrawn. 

The  monetary  unit  is  the  gold  mark  of  .398-24^ 
grammes  900  fine  or  .3.5842  grammes  of  fine  gold.  It 
is  represented  in  the  circulation  by  coins  of  10  marks 
and  20  marks. 

A  kilo  of  fine  gold  will  produce  in  coin  2790  marks. 
The  six  German  mints  accept  foreign  coins  for  recoin- 
age  but  charge  6  marks  per  kilo  of  fine  gold  for  ex- 
'penses  in  addition  to  some  minor  charges. 

212 


GERMAN  EXCIIANdK 


SIS 


The  Reichsbank  will  buy  foreign  unld  coins  at  the 
foliowiriff  rates  i)er  iiilo:  soverci^iis  M.  2.551. oSO ;  ^ol,] 
coins  of  the  Latin  Union  and  of  Austria  M.  2.')04.208, 
coins  of  the  Ui  litcd  States  M.  2.>0.>.(!0. 

Silver  coins  are  of  5,  2.  1  mark  and  50  pfennig  ('{. 
mark).  The  silver  mark  weighs  5.555  grammes  900 
fine. 

Hank  notes  in  denominations  of  1,000,  100,  50.  20 
and  5  marks,  are  issued  by  the  Heiclisbank.  The 
Reichsbank  is  authorized  to  issue  notes  in  any  amount 
provided  the  issue  is  covered  by  metal  (which  includes 
gold  and  silver)  treasury  notes  and  the  notes  of  other 
banks.  It  may  issue  notes  also  if  M  is  covered  bv 
metal,  and  the  balance  secured  by  bills,  but  the  total 
issue  must  not  exceed  541,000,000  marks. 

Xotes  of  four  other  banks,  one  each  in  Raden, 
Havaria,  Saxony  and  AVuerttemberg,  in  dcnonnna- 
tions  of  100  marks  are  also  in  circulation.  There  are 
also  g'overnmental  treasury  notes,  the  amount  of 
which  is  said  to  have  been  increased  rnormously  after 
August,  1914. 

3.  Stamp  duties.— Chec]is  are  subject  to  a  tax  f)f 
10  pfennige  each,  irrespective  of  amount,  and  bills  of 
exchange  must  pay  50  pfennige  for  each  1,000  marks 
or  fraction.  The  stamp  tax  can  be  avoided  on  checks 
by  writing  after  the  name  of  the  drawee  bank  "Pay 
against  this  check  from  our  credit  balance." 

For  quotation  purposes  the  stamp  duty  is  reckoned 
at  Kn  of  1  per  cent  or  .05  cent  per  400  marks.     Drafts 


214     DOMESTIC  AND  FOREIGN  EXCHANGE 

drawn  in  dollars  are  stamped  on  the  basis  of  4.25 
marks  per  dollar. 

In  order  to  avoid  German  stamp  duty,  Ameriean 
exporters,  instead  of  drawing  sight  drafts  on  their 
German  customers,  instruct  the  latter  by  formal  letter 
to  pay  the  amount  of  the  purchases  to  the  American 
bank's  German  correspondent. 

These  are  called  Letters  of  Delegaticm  and  are  sold 
quite  extensively.  They  are  usually  accompanied  by 
bills  of  lading  only,  to  be  delivered  on  payment  of  the 
amount  involved.  Sometimes,  however,  the  other 
shipping  documents  are  attached  as  in  the  case  ol 
documentary  drafts. 

The  Imperial  Reichsbank  of  Germany  transfers 
money  from  one  branch  to  another  ;  i  .e  of  charge  for 
cUents  who  carry  satisfactory  balances.  These  are 
known  as  Giro  conto  transfers.  Outside  of  conven- 
ience to  the  customers  the  practice  evades  the  stamp 
duty  on  checks. 

As  money  can  be  transferred  by  the  Giro  conto  sys- 
tem to  any  city  in  Germany  where  a  branch  of  the 
Reichsbank  is  located,  premium  or  discount  on  ex- 
change between  different  German  cities  (as  in  the  case- 
between  New  York  and  Chicago  or  between  Canada 
and  the  United  States)  is  unknown. 

4.  Interest  rates  and  commercial  usages. — Interest 
is  calculated  on  a  basis  of  four  marks  to  95  cents,  and 
860  days  to  the  year  and  80  to  the  month.  There  are 
no  days  of  grace. 

Documentary  acceptance  bills  are  generally  dis- 


GERMAX  EXCHAN(JE 


215 


toiiiited  at  the  open  market  (private  discount)  rate 
imd  douiiiiieiitary  pai/ment  l)ilis  at  tlie  Reiclisbank 
<Ii.seount  rate. 

Contrary  to  the  practice  of  Kn^dish  hanks,  German 
lianks  will  discount  documentary  pai/wcnt  hills  and 
place  the  proceeds  to  the  credit  of  the  foreign  hank's 
account. 

Cash  items  and  remittances  are  credited  to  the  ac- 
count "value"  ( by  value  is  meant  the  date  from  which 
interest  is  credited  or  debited)  the  day  follmdng  the 
date  of  actual  jiayment,  instead  of  "value"  the  date  of 
l)ayincnt  as  in  London. 

In  the  case  of  sight  bills  drawn  with  documents 
aj-ainst  acceptance,  the  first  of  exchange  is  generally 
forwarded  direct  to  the  point  on  which  it  is  drawn  for 
the  purpose  of  fixing  the  date  of  maturity  of  the  bill 
at  the  earliest  possible  moment.  The  second  of  ex- 
change is  forwarded  direct  to  Berlin  or  other  central 
t()wn  in  which  the  foreign  bank  keeps  its  account,  for 
discount  and  credit. 

It  is  not  customary  to  indorse  the  first  of  exchange, 
hut  indorsements  by  the  bank  may  be  made  to  the 
"iiler  of  its  correspondent  in  Berlin,  to  whom  the  duly 
indorsed  seconds  are  remitted  in  due  course. 

Importers  in  Germany  as  a  rule  will  not  accept 
•irafts  against  importations  until  the  duplicate  docu- 
ments (duplicate  draft,  bill  of  lading,  etc.)  are  pre- 
sented, and  in  order  to  have  the  original  draft  ac- 
cepted immediately  upon  its  arrival,  banks  in  this 
country  when  forwarding  such  bills  for  acceptance 


S16      DOMESTIC  AND  FOIIKICN  KXCHANGE 

and  collection,  will  attach  to  the  original  draft  a  mem- 
orandum affreement  to  the  effect  that  tlie  dupheiit' 
bill  of  lading  is  in  their  possession  and  that  the  diiiili- 
cate  documents  will  he  delivered  in  due  course. 

In  the  case  of  hills  which  are  not  puyahle  in  Ilaiii- 
huTfi  or  Herlin,  a  conuiiission  charge  varying  fnun 
Vio  to  /III  of  1  per  cent  is  made  for  collection.  'Phis 
charge  should  of  course  he  taken  into  consideration  in 
calculating  the  value  of  a  hill. 

5.  German  quoiatinnn. — Herlin  quotes  on  an  eight- 
day  basis,'  marks  per  foreign  unit  or  hundred  unit: 


London 20.4.5V[;   mnrks  per  £1 

Liitin  Union.  .  .      81.:J0  "       "  pir  100  francs 

Austria    8.5.30  "  pir  100  crowns 

Russia    216.  "  JHT  100  roubles 

Amsterdam    ...  168.70  "  per  100  florins 

New  York 4.22  "  per  .*1 

6.  American  quotations. — Quotations  at  .so  many 
cents  (about  23.87)  to  the  mark  are  used  only  in 
minor  exchange  operations  and  for  drafts  drawn  on 
small  Cerm.'in  towns.  In  the  case  of  large  transac- 
tions marks  are  generally  quoted  9.5'{'  or  9.5/,s,  etc. 
(advancing  by  Vinth  of  a  cent  per  4  marks)  which 
means  that  four  marks  are  worth  95/-;  or  9.5%,  etc., 
cents.  When  this  method  is  used,  it  is  necessary, 
when  making  calculations,  to  multiply  or  divide  hy 
four,  in  order  to  obtain  the  rate  per  dollar  or  per  mark. 

For  all  ordinary  transactions  this  method  of  quota- 

iTo  obtain  the  rhpck  rate  add  8  days'  interest;  tliere  are  no  daT! 
Of  grace  in  Germany. 


GEllMAN  EXCIIAXC.K 


an 


tioii  is  sufficient,  but  in  wholesale  transactioiw,  where 
the  (luotutions  are  necessarily  close,  the  shading  is 
effected  by  increasing  or  decreasing  the  <iuotations  by 
o^  of  1  per  cent  of  the  dollar  amount. 

Where  the  fractional  rate  of  plus  or  minus  is  used, 
it  applies  only  to  the  amount  in  dollars.  Therefore  in 
converting  dollars  into  marks: 

(a)  A  plun  fraction  means  that  fciacr  marks  will 
be  obtained,  so  deduct  the  fraction  from  the  marks. 

(b)  A  minun  fraction  means  that  more  marks  will 
lie  obtained,  so  add  the  fraction  to  the  marks. 

A  study  of  the  following  table  will  make  the  use  of 
these  equivalents  clear.  Jt  will  be  noticed  that  a 
niimis  sign  before  the  fraction  decreases  the  dollars, 
and  increases  the  marks,  and  a  plus  sign  before  the 
(ruction  increases  the  dollars  and  decreases  the  marks. 


its  per  4  nia 

rks 

fonts  |HT  11 

9fi  —  %i 

!i.'i.9«875 

96  —  '/i;; 

2;J.992,')0 

96-Mi4 

2!J.99625 
24. 

:'■'      )* 

24.0(i;J7.'3 

'  i2 

24.0075 

M  -r  7u4 

24.01123 

4.168620 
4.167969 
4.167ai7 
4.166666 
4.1f)fi01,5 
4.16r,;}6,5 
4.164714 

7.  Conversions.— 2\s  (Jermany  uses  the  decimal 
system,  additions,  subtractions,  etc.,  are  performed  in 
tile  same  manner  as  for  dollars. 

To  convert  marks  into  dollars.—Multiply  the 
amount  in  marks  by  the  rate  in  cents. 

3,000  marks  at  .238  per  mark  =  3000  X  .238  =  $714. 


«18     DOMESTIC  AND  FOREIGN  EXCHANGE 

To  convert  dollars  into  marks.— Divide  the  rate 
into  the  amount  in  dollars. 

$714  at  .238  =  714  -H-  .238  =  3,000  marks. 

The  same  rules  apply  when  the  special  quotation  of 
cents  per  four  marks  is  used;  care,  however,  must  be 
used  to  (livide  by  four  when  converting  marks  into 
dollars  and  multiply  by  four  when  converting  dollars 
into  marks. 

(a)  Marks  1,466  at  95V,  = ^ = j ^3-w. 

(b)  $350  at  951/2  =  4  (350 -T- .955)  =  366.492  X  *  = 
Mks.  1465.968. 

In  converting  marks  into  dollars  when  fractional 
rates  are  used,  find  the  amount  in  dollars  at  the  clean 
rate  as  in  (a),  then  add  or  deduct  the  fraction,  as  the 
case  may  be,  to  or  from  the  amount. 

Marks  1,466  at  95 Va  =  $350   (sec  example  a). 
Marks  1,466  at  95%  +  %;  =  $350  +  .11  (Vii  of  \Jc  of 
$350)  =  $350.11.  *„,„„„ 

Marks  1,466  at  95M..  —  Vi-i  =  $3.50  —  .11  =  $349.89. 

In  converting  dollars  into  marks  you  reverse  the 
fractional  signs  plus  or  minus: 

(c)  $349.89  at  951/0  less  1/32  =  349.89  plus  1/32  of  itself  = 
^  349.89 +  .11  =$350. 

Id)  $350.11  at  951/2  plus  1/32  =  350.11  minus  1/32  of  itself  = 
^   '  350.11  — .11  =  $350. 

We  can  then  proceed  as  in  example  (b)  and  reduce 
$350  to  marks  =  Marks  1,465.97. 


GERMAN  EXCHANGE 


S19 


8.  Profits. — When  the  rate  is  quoted  in  cents  per 
mark,  a  fluctuation  of  .01  cent  amounts  to  about  42 
lents  per  $1,000.  Vn  of  1  per  cent  profit  would  be  rep- 
resented by  .03  cent  advance. 

$1,000  at  24       =  4166.67 
1,000  at  24.03  ^  4161.46 


a  gain  of  marks 


5.21  or  $1.25  on  $1,000 


When  the  quotation  is  cents  per  4  marks  an  in- 
crease in  the  rate  of  V^  cent  (96  to  96%)  corresponds 
roughly  to  Vn  of  1  per  cent  in  the  dollar  amount. 

$1,000  at  96      =4166.67 
1,000  at  96%  =  4161.25 


a  gain  of         5.42  or  $1.31  per  $1,000 

If  it  is  desired  to  make  an  exact  profit,  take  the  per- 
centage on  the  rate  itself. 

Rate  .96 

Profit,    Vi   of   1%     .0024 


$1,000  at  96 
1,000  at  96.24 
1,000  at  96  V4 


.9624  per  4  marks  or  24.06c. 

mark 
4166.67 
4156.28 
4155.84 


per 


at  96.24  a  profit  of  10.39  marks  or  $2.50  is  made,  and 
at  96'4  a  profit  of  10.83  marks  or  $2.60,  a  difference 
of  ten  cents  per  $1,000  in  favor  of  the  seller.  The 
latter  method  is  close  enough  therefore  for  ordinary 
transactions. 


220      DOMESTIC  AND  FOREIGN  EXCHANGE 

A  fractional  variation  of  ¥04  of  1  per  cent  of  course 
represents  15%  cents  per  $1,000. 

9.  Purchase  of  German  long  bills. — The  demand 
rate  is  the  basis  from  which  the  rates  for  bills  are  cal- 
culated. 

The  German  official  bank  rate  and  the  private  dis- 
count rate  govern  the  interest  on  the  different  classes 
of  bills. 

Quotations  for  time  bills  drawn  on  Germany  are 
arrived  at  by  deducting  the  interest,  stamps,  etc.,  from 
the  demand  rate. 


GERMAN  EXCHAKGE  INTEREST  TABLE  FOR  USE  IN 
PURCHASING  BILLS  OE  EXCHANGE 


Rate 

3  flays' 

10  days' 

30  dnvs' 

60  days' 

90  davs 

per  cent 

sight 

sight 

sigf.t 

sight 

sight 

Basis 

$95. 

$95. 

$95. 

$95. 

$95. 

^a 

.001 

.002 

.005 

.010 

.013 

i 

.001 

.003 

.010 

.020 

.030 

■  \ 

.OOi 

.007 

.020 

.040 

.039 

'  1 1 

.004 

.013 

.040 

.079 

.119 

I 

.006 

.030 

.059 

.119 

.179 

.008 

.026 

.079 

.138 

.237 

'% 

.016 

.053 

.158 

.317 

.475 

S% 

.02i 

.079 

.238 

.475 

.71-' 

*% 

.032 

.106 

.317 

.633 

.930 

i% 

.040 

.132 

.396 

.792 

i.is; 

6% 

.047 

.158 

.475 

.950 

1.423 

Stamps 

.05 

.05 

.05 

.05 

.03 

The  above  figures  are  calculated  on  the  basis  of  marks 
400  being  equal  to  $95  and  360  days  to  the  year. 

What  price  can  be  paid  for  60  days'  sight  drafts  on 
Hamburg,  Rcichsbank  rate  3  per  cent,  check  rate  95.50? 
New  York  check 

rate  on  Berlin       951/2  =  95.50 
Less     stamp 
duty   %>o   of 
1%    —.05 


GERMAN  EXCHANGE  agi 

60    days    at 

a%  ....  —  .48  .53 

,,  ..     VT      ir    ,  ^^-^^  "^  ^^  —  '^32  per  4  marks 

If  the  New  York  rate  is  supplemented  by  a  fractional  quo- 
tation, the  following  decimals  should  be  added  or  deducted 
as  the  case  may  be,  to  the  rate  in  calculating  the  value  of 
the  bills: 

%4         .015         Vs.,         .00030         %,         .0004.'5 
Fmd  the  price  of  a  thirty-day  sight  draft,  interest  SVc, 
check  rate  95VL>  plus  %^. 

Cheque  rate 95  50 

plus  %4  of  17c _Q4.5 

95  545 

less  Stamps  %o  of  1  % —  .05 

30  days  at  3% —  .24         .29 

95.255  or  95% 
In  Canada  the  above  calculations  would  be  affected 
by  the  discount  or  premium  on  New  York  funds;  in 
German  exchange  the  premium  is  added  or  deducted 
as  the  case  may  be. 

REVIEW 

What  has  made  the  Berlin  exchange  market  important' 

Ucscribe  the  German  monetary  system. 

How  do  American  exporters  avoid  German  stamp  duty' 

How  IS  mterest  calculated  in  Germany.'  What  is  tlie  German 
com„H..rcial  u.sage  regarding  drafts  against  importations  and  what 
practice  should  American  banks  follow  in  forwarding  such  biUs 
tor  acceptance  and  collection .' 

How  are  German  quotations  made.'  What  kind  of  quotations 
are  used  in  minor  exchange  operations  and  what  kind  in  large 
transactions .'  " 

What  is  the  basis  from  which  rates  for  bills  are  calculated' 
vv  Hat  ^governs  the  interest  on  the  diiferent  classes  of  bills  in  Ger- 


1] 


CHAPTER  XVII 


EXCHANGE  WITH  OTHER  COUNTRIES 

1.  Gold  bads  of  exchange. — The  facility  with  which 
exchanges  are  effected  is  due  to  the  fact  that,  witii 
few  exceptions,  the  monetary  systems  of  the  world  are 
on  a  gold  basis,  or  at  least  a  gold  exchange  basis. 
Where  the  contrary  is  the  case  the  exchange  situa- 
tion causes  much  difficulty  locally  and  hampers  tiie 
growth  of  international  relations.  Whatever  may  be 
the  local  circulation  iold  has  come  to  be  the  interna- 
tional money;  and  >•<  ations  of  all  nations  with  tlie 
great  financial  centers  are  based  upon  gold  even  tho 
they  have  not  the  gold  standard. 

It  is  natural  therefore  that  the  nations  which  early 
adopted  the  gold  standard  should  have  an  ascendancy 
in  foreign  trade.  We  have  already  spoken  of  three 
principal  centers,  and  it  remains  only  to  consider  Am- 
sterdam, which  ranks  among  the  chief  exchange 
marts. 

2.  Dutch  exchange. — The  monetary  unit  of  the 
Netherlands,  is  the  florin  (guilder  or  gulden)  100 
Dutch  cents  (40.2  cents)  weighing  .6048  grammes  of 
fine  gold. 

Quotations  on  Holland  are  stated  in  cents  per 
guilder  or  florin  (the  par  value  being  40.20  cents) 
advancing  by  .01  cent  as  in  the  other  exchanges  40.20, 


EXCHANGE  WITH  OTHEll  COUNTRIES     223 


40.21,  40.22  cents,  etc.  The  rate  is  also  expressed 
40M6,  iOVn  cents,  etc.,  and  for  large  transactions  the 
rates  are  sui)pleinented  by  fractions  as  in  German 
quotations. 

Tile  conversion  i.s  simple  arithmetic.  To  convert 
dollars  into  florins,  divide  the  dollars  by  the  rate  per 
florin.  To  convert  florins  into  dollars,  nmltiply  the 
amount  in  florins  by  the  rate  per  florin. 

The  bill  stamp  is  /iii  of  1  per  cent  or  two  cents  per 
i?40. 

Interest  on  Dutch  long  bills  is  based  on  $40  per 
100  guilders  or  florins.'  There  are  no  days  of  graci; 
and  interest  is  reckoned  by  taking  the  exact  number 
of  days  and  the  year  at  360  days. 

When  fractional  rates  are  used  they  should  be 
dealt  with  in  a  manner  similar  to  the  method  used  in 
(ierman  calculations,  and  added  to  or  deducted  from 
tile  dollar  value  when  converting  florins  into  dollars, 
hut  when  dollars  are  converted  into  florins,  the  equiv- 
alent of  the  fraction  converted  into  florins  must  be 
added  if  minus,  and  deducted  if  plus. 

Thedifl'erencesmadeby:  (1)  a  fractional  advance ; 
(2)  one-hundredth  of  a  cent  advance;  (3)  iio  of  a 
cent  advance,  are  illustrated  below: 


Kiorins 

2.,500390 
a.50 


lintr 


40- 
40 


Dftllars 

.3999375 
.40 


1  The  Intereit  is  easily  reckoned  on  a  basis  of  $40  per  100  florins,  or 
Ihc  constant  ii^oo  niultiplied  liy  the  r.ite  and  time  will  give  the  interest 
•n  .*tO. 

60  days  at  *%  =  '/{««  X  60  x  ♦  =  ■'/is  of  ^0%  cents. 

XVII — 16 


,j     . 


224      DOMESTIC  AND  FOREIGN  EXCHANGE 

Florins  Rat""  Dollars 

2.49!)()()!)  40  —  y«4  .4000625 

.mmr,  40.01  .4001 

2.4i)60!)!)  40  y,  a  .400625 

An  advance  of  .01  cent  in  rate  represents  a  profit  of  25 

cents  per  !i!l,O0O. 

An  advance  of  Yio  cent  (or  .06'/4  cent)  represents  a  profit 

of  $1.56  on  $1,000. 

When  quoted  rates  are  supplemented  by  fractional 
quotations  it  is  necessary  to  take  these  fractions  into 
consideration  in  calculating  the  rates  to  be  paid  for 
bills  as  follows: 

%4     .0062  ]  Add  for  a  plus  percentage. 

Yin     .0250 J  Deduct  for  a  minus  percentage. 

Example. — Find  the  value  of  a  60  day  bill  on  Amsterdam, 
discount  rate  S'/c ,  demand  rate  -iOV^n —  V32 

40'/r(;   =  40.0625 

less  ',30  of  l'> 0125 

40.0500 
Less  Interest  60  days 

at  S5'/'    ; 20 

Stamps    y<o    of 

I'/f.     02  .22 

39.8300  or  39.83  cents  per  fl. 

3.  Exchange  ivith  other  gold  standard  countries. — 
Apart  from  variations  in  the  money  unit,  the  calcula- 
tion of  the  mint  par  of  exchange  with  other  gold 
standard  countries  offers  little  difficulty.  It  is  suffi- 
cient to  refer  here  to  the  tables  at  the  end  of  this  vol- 
ume, in  which  full  information  concerning  the  coins 


I 


EXCHANGE  WITH  OTHER  COUNTRIES      285 


of  the  nations  of  the  world  is  given.  Tlie  mint  par 
between  any  two  countries  is  always  obtained  by  di- 
viding the  weight  of  line  gold  in  the  unit  of  one  coun- 
try by  the  weight  of  the  tine  gold  in  the  unit  of  the 
other. 

Tho  known  by  different  names  in  various  countries 
it  will  be  noted  that  the  cohi;ige  is  in  many  cases  iden- 
tical. The  chief  monetary  groups  are  those  of  the 
pound  sterling,  the  franc,  the  dollar  and  the  crown 
( Scandinavian) .  This  renders  the  calculation  of  the 
mint  par  comparatively  easy,  and  this  calculation 
is  further  facilitated  by  the  fact  that  apart  from  the 
British  and  Indian  currencies  the  monetary  denomi- 
nations of  all  countries  follow  the  decimal  basis. 

When  two  countries  have  identical  systems  ex- 
change may  be  quoted  on  the  percentage  basis.  Thus, 
London  exchange  on  Australia  is  expressed  as  a 
percentage  discount  or  premium  as  the  case  may  be. 
It  is  of  course  to  be  understood  that  while  the  mint 
jnir  of  exchange  can  be  readily  calculated  from  a  table 
wliicli  expresses  the  coins  of  different  countries  in 
terms  of  fine  gold,  such  a  table  does  not  contain 
the  information  necessary  to  ascertain  the  gold  ship- 
I)iiig  jioints.  These  depend  not  only  upon  the  cost  of 
transportation  including  insurance  but  also  on  the 
mint  charges  o''  ''he  respective  countries. 

4.  Exdmnge  quotations. — The  calculation  of  the 
mint  par  of  exchange  between  certain  countries  has 
more  of  theoretical  than  of  practical  interest.  There 
are  few  if  any  countries  which  have  direct  exchange 


226      DOMESTIC  AND  FOREIGN  EXCHANGE 


relations  with  each  one  of  the  others.  Most  of  these 
countries  have  dealings  with  Great  Britain  and  ster- 
ling exchange  is  therefore  the  most  widely  used  inter- 
national money  of  payment.  Nearly  every  country 
is  interested  therefore  in  London  exchange,  and  Lon- 
don, according  to  the  measure  of  its  dealings,  is  inter- 
ested in  exchange  on  such  countries.  The  interest 
in  other  financial  centers  is  less  uni'ersal. 

Consideration  has  been  given  in  the  preceding  chap- 
ters to  the  principal  countries  with  which  New  York 
has  direct  dealings.  Before  the  war  there  were 
only  a  few  other  countries  perhaps,  Italy,  Spain, 
Russia,  Austria  and  the  Scandinavian  countries  witli 
which  direct  exchange  relations  were  sufficiently  nu- 
merous to  admit  them  to  the  newspaper  lists  of  ex- 
change quotations.  Of  course  this  does  not  imply 
that  the  United  States  was  without  commercial  rela- 
tions with  many  countries  besides  those  which  have 
been  mentioned.  Adjustments  with  those  countries 
were  effected  for  the  most  part  thru  the  medium  of 
sterling  exchange. 

Since  the  outbreak  of  the  European  war  New  York 
has  been  less  dependent  upon  London.  Countries 
which  heretofore  sought  new  supplies  of  capital  in 
Europe  are  looking  to  the  United  States.  A  consid- 
erable number  of  foreign  loans  have  been  floated  in 
New  York,  and  quotations  of  foreign  bonds  have  be- 
come a  regular  feature  of  the  stock  exchange  reports. 
As  a  consequence  there  have  been  established  direct 
relations  which  did  not  exist  before,  and  the  exchange 


EXCHANGE  WITH  OTHER  COUNTRIES      S{iJ7 

(|uotatioiis  now  include  a  number  of  countries  which 
did  not  figure  in  them  before  1914.  How  far  those 
conditions  are  liiiely  to  be  permanent  is  discussed  in 
tlie  next  chapter. 

.5.  Gold  exchange  standard. — An  economical 
method  of  enjoying  the  international  advantages  of  a 
«<>ld  standard  without  the  burden  of  maintaining 
large  gold  reserves  is  offered  by  the  gold  exchange 
standard.  The  local  currency  may  be  either  silver. 
[)aper,  or  both,  but  the  government  or  bankers  of 
these  countries  by  the  sale  of  exchange  or  other  means. 
!irc  able  to  settle  all  international  transactions  on  a 
gold  basis. 

The  government  of  a  gold  exchange  standard 
country  will  take  gold  in  exchange  for  local  currency 
liut  does  not  undertake  to  give  gold  for  internal  use  in 
exchange  for  local  currency,  tho  it  does  provide  gold  in 
(ither  countries;  that  is,  it  will  sell  bills  on  these  coun- 
tries or  even  ship  gold  if  necessary.  The  bills  are 
sold  at  a  price  a  little  below  the  normal  "export  point" ; 
in  other  words,  the  buyer  has  to  pay  a  little  less  than 
the  actual  cost  of  shipping  gold  itself  providing  he 
was  able  to  obtain  it.  It  is  essential,  however,  that 
tile  local  currency  received  for  the  bills  must  not  be 
put  back  into  general  circulation.  The  reason  for 
this  precaution  is  apparent  when  it  is  pointed  out  that, 
111  a  gold  standard  country,  when  exchange  l)ecomes 
unfavorable,  the  corrective  exjwrt  of  gold  contracts 
tlie  currency  and  thus  tends  to  raise  the  rate  of  dis- 
lount  and  lower  prices,  which  checks  the  outflow  of 


928      DOMESTIC  AND  FOREIGN  EXCHANGE 


ff(A(].  In  a  ^old  exchaiifje  stnndnrd  country  the  sale 
'i)f  hills  is  equivalent  to  an  outflow  of  j^old  and  should, 
therefore,  have  the  same  effect  of  contracting  the  cur- 
rency. This  it  will  not  do  unless  the  paper  or  silver 
money  so  received  is  withheld  hy  the  Government 
from  circulation  until  a  demand  for  more  currency  is 
manifested  by  the  puhlic  offering?  f^old  for  it. 

0.  Philipj/ine  Islands. — The  Philippines  may  hv 
taken  as  a  concrete  example  of  the  operation  of  a  pfold 
exchanf^c  standard.  The  currency  consists  of  silver 
pesos  issued  by  the  United  States  (iovernmcnt  at  a. 
guaranteed  or  fixed  value  of  fifty  cents  gold,  the 
seigniorage  or  profits  from  which  are  deposited  in 
New  Vork  as  a  reserve.  When  exchange  becomes 
unfavorable,  drafts  on  New  York  are  sold  by  thu 
Philippine  Treasury  and  the  silver  pesos  received  in 
j)ayment  are  withdrawn  from  circulation  until  the  ex- 
change once  more  becomes  favorable  and  gold  is  of- 
fered in  exchange  for  currency. 

7.  India. — A  somewhat  similar  system  prevails  in 
India.  The  currency  consists  of  silver  rupees  issued 
by  tile  Government  out  of  the  i)rofits  of  which  a 
"Gold  Standard  Reserve"  has  been  accumulated  in 
London  and  invested  in  gold  and  short  date  and  cash 
loans.  AVlien  the  exchange  value  "f  the  rupee  falls 
below  10  pence  gold,  the  parity  is  niaintained  by  the 
sale  of  bills  drawn  on  I,ondon.  These  bills  are  met 
from  the  funds  of  the  "Gold  Standard  Reserve"  and 
the  rupees  received  in  payment  are  kept  out  of  cir> 
culation. 


EXCHANGE  WITH  OTHrR  COUNTIIIES      2«9 

8.  Argentina. — The  Argentina  currency  is  on  the 
model  of  that  of  France,  and  the  peso  is  ccinivalcnt 
to  the  tive-franc  gold  piece.  It  weighs  I.4.>1(!40 
grammes  of  fine  goM  equivalent  to  $.9047")  or  47..5H 
pence.  Argentina  introduced  the  gold  standard  in 
1881  but  maintained  it  for  only  five  years  when  a 
,iaper  currency  took  its  place.  CJold  commanded  a 
premium  subject  to  enormous  fluctuations.  In  1890 
the  Government  fixed  the  premium  in  gold  at 
1-27.2727  per  cent;  that  is  to  say,  it  fixed  the  value  of 
the  dollar  in  paper  at  ii  cents  gold  or  $100  paper 
e(iual  $44  gold  or  . """;/""'  ^^  227.27  paper  dollars 
e(|ual  $100  gold.  The  value  of  the  currency  or  theo- 
retical dollar  in  United  States  money  is  therefore 
*.90475  X  .44  ==  $.42449,  and  in  English  money  47.- 
.)8d  X  .44  =  20.93.5  pence.  The  Government  main- 
tains this  parity  thru  the  medium  of  the  "Caja  de  Con- 
version" which  exchanges  notes  (curso  legal)  for  gold 
coins  and  gold  coins  for  notes  on  a  basis  of  44  gold 
leiitavos  per  paper  dollar.  The  following  foreign 
coins  are  legal  tender  at  a  fixed  rate: 

SoTcreign,  for  gold $.5.04 

20  franc  piccev,  for  gold 4.00 

Eaglos,  for  gold 10..'J64 

20  mark  p'wn;  for  gold 4.9(5 

Peru,  5  soles,  for  gold 5.00 

Spain,  25  pesetas,  for  gold 3.00 

Rilk  of  exchange  on  foreign  countries  are  quoted 
both  in  gold  and  paper  and  rates  fluctuate  according  to 


«J0      DOMESTIC  AND  FOHKKJN  EXCHANGK 


the  usual  course  of  supply  and  (leniutid,  the  rate  for  a 
UO-day  hill  on  London  varyin>{  from  47  H  to  4i)'i 
jHjnce  per  j^old  peso.  To  convert  a  gohl  cpiotation  to  a 
paper  basis,  multiply  the  j?old  rate  by  44  eentavos;  I'or 
example,  48'/i!d  X  .44  -  21.34  pence  or  vice  versa;  ti» 
convert  a  paper  rate  to  gold  divide  by  .44.    ~ 


1--48'. 

pence.     The   value   of  a   sovereign   is   $.5.04.5  gold. 
=  $11,459  paper  pesos.     Quotation^ 


therefore 


'■■045 
.U 


in  New  York  vary  from  4I'-,'  cents  to  43/i!  cents  per 
paper  peso  (94.32  cents  to  98.8t!  cents  per  gold  peso) . 

9.  Urazil. — The  unit  is  the  milreis  divided  intd 
1,000  reis.  The  milreis  weighs  .82207  gr.  of  fine  gold 
equivalent  to  $.54034. 

The  circulating  medium  is  composed  of  convertible 
and  inconvertible  (iovernment  notes,  both  classes  of 
notes  having  leg.il  tender  (jualities  and  the  same  pur- 
chasing power  in  the  country.  In  190()  the  HraKiliaii 
Government  established  the  "Caixa  do  Conversao  ' 
on  the  model  of  the  Argentina  "Caja  de  Conversion  " 
and  fixed  the  value  of  the  paper  currency  at  15  pence 
per  milreis  or  10  milreis  to  the  pound  sterling  and  is- 
.sued  on  that  basis  320,000,000  milreis.  In  January, 
1911,  tlie  (iovernment  increased  the  amount  of  con- 
vertible notes  and  increased  the  value  of  the  pa|)er 
milreis  to  10  pence  or  15  milreis  to  the  pound  sterling. 
This  overvaluation  was  unwise  as  it  precipitated  ;i 
financial  crisis  from  which  Brazil  is  still  suffering'. 
At  15  pence  per  paper  milreis,  gold  was  at  a  premium 
of  79.63  per  cent,  or  1  milreis  in  gold  equalled  1.79<>;5 


EXCHANGK  WITH  UTHKR  COLNTUIES     Ml 

])»per  luilreis.  In  fixing  the  value  of  the  niiireis  at 
It)  pence  instead  of  1j  pence  tlie  Government  lowered 
the  premium  on  gold  to  08.40  per  cent,  or  1  milreis 
j^i)ld  —  1.084  paper  mih'eis.  As  u  sovereign  eonttiiiis 
7.;W238  gr.  of  fine  gold  the  present  theoretical  unit, 
like  that  of  India,  weighs  '/ir.  of  7.!}il'ja8  or  .48810 
Hi:  of  fine  gold;  ecjuivalent  to  <i2.44l'  jents  (or  as 
tlicre  are  .82207  gr.  of  fine  gold  in  the  gold  milreis 
^i:^X  . 82207 -. 488  lOgr.). 
Hruzil  ({uotes  as  follows: 

Luruloii    ....    !)0  dav.s  .sight  in  pence  per  milreis, 

Paris DO  days  sight  iiiilrei.s   per  franc-, 

Hamhurg    .  .    90  days  sight  milreis   per  mark. 
New  York  at 

.sight    ....    90  days  sight  milreis  per  dollar. 

Owing  to  the  depreciation  of  the  paper  milreis,  the 
war  and  other  causes,  the  (juotations  on  London  have 
rtcently  ruled  low;  about  12  or  13  pence  per  milreis 
as  against  the  theoretical  normal  of  10  j)ence.  When 
the  paper  currency  of  a  country  depreciates,  the  ex- 
changes fall  in  sympathy  because,  as  foreign  exchanges 
are  on  a  gold  basis,  the  premium  on  gold  naturally  ex- 
tends to  them.  Depreciation,  therefore,  stimulates 
fx[)()rts  and  benefits  those  who  have  to  receive  money 
from  foreign  countries,  but  checks  imports  and  ad- 
\  erstly  affects  those  who  have  to  pay  money  to  foreign 
countries.  For  instance,  in  the  case  of  Brazil,  when 
exchange  is  at  1.5  pence  per  milreis,  an  exporter  would 
itceive  10,000  milreis  for  a  £1,000  draft  on  London, 


232      DOMESTIC  AND  FOREIGN  EXCHANGE 


but  with  exchange  fallen  to  12  pence,  he  would  receive 
20,000  milreis  for  the  £1,000— a  profit  of  4,000  mil- 
reis,  probably  clear,  as  it  is  unlikely  that  his  rent  and 
other  expenses  in  Brazil  have  increased.  He  has 
made  a  large  profit  out  of  the  turn  of  exchange.  On 
the  other  hand,  an  importer  buys  £1,000  worth  of 
goods  in  England;  he  will  have  to  pay,  when  exchange 
is  at  1.5  pence,  16,000  milreis;  but  when  exchange 
drops  to  12  pence  per  milreis,  he  will  have  to  pay  4,000 
milreis  more  for  his  £1,000.  Consequently,  the  im- 
porter has  to  be  constantly  raising  his  prices  to  meet 
the  fall  in  exchange,  and  the  public  in  turn  have  to 
meet  these  increases  and  pay  greatly  enhanced  prices 
for  the  nec?ssaries  of  life,  altho  their  wages,  salaries, 
etc.,  remain  exactly  the  same.  A  ninety-day  sight 
bill  on  London  has  an  average  currency  of  110  days 
(17  days'  voyage  +  90  days  +  3  day's  grace). 

10.  Silver  standard. — The  silver  standard  exists  in 
countries  where  it  is  enacted  by  law  that  silver  alone 
shall  be  legal  tender  and  the  measure  of  value.  China 
and  its  dependencies  and  some  countries  in  South 
America  are  the  exponents  of  this  standard.  (  The 
domestic  trade  of  these  countries  is  regulated  by  the 
bullion  price  of  silver,  but  all  outside  transactions 
are  based  on  gold,  and  in  the  end  the  value  of  silver 
is  thus  regulated  by  these  international  transactions. 
The  number  of  silver  using  countries  is  rapidly  de- 
creasing. With  the  exception  of  Japan  and  India, 
practically  all  Eastern  nations  use  silver  either  in  the 
form  of  coins  or  bars,  and  the  rates  of  exchange  rise 
and  fall  with  the  price  of  silver.     Owing  to  the  vio- 


i 


EXCHANGE  WITH  OTHER  COLNTiMKS      iliyi 


lent  variations  in  these  rates,  business  is  a  highly 
specialized  one  and  quotations  and  drawing  facilities 
on  the  Orient  are  usually  provided  by  one  of  the 
iVnglo-Asiatic  banks. 

11.  China. — As  an  illustration  of  a  country  with  a 
silver  standard,  we  may  consider  China.  The  ancient 
unit,  the  tael,  continues  to  be  used.  A  tael  is  actually 
a  weight  and  not  a  coin  and  circulates  in  the  form  of 
shoe  shaped  slugs  or  small  bars,  and  each  province 
has  a  slightly  different  equivalent.  The  variation  in 
weight  in  the  sixteen  principal  kinds  of  tael '  is  from 
;J7.3317  gr.  of  fine  silver  in  the  Hai  Kwan  tael  to 
34.0732  gr.  fine  in  the  Swatow  tael.  The  Hai  Kwan 
(or  customs)  tael  is  the  most  important.  It  is  gen- 
erally rated  at  72  per  100  Mexican  dollars.  The  ofli- 
tial  tael  agreed  upon  by  treaty  is  the  K'up'ing  tael 
divided  into  100  cents  of  ten  mills  each.  This  unit 
weighs  37.513  gr.  .980  fine  and  contains  36.56674  gr. 
of  fine  silver.  The  Chinese  monetary  system  has  been 
still  further  complicated  by  the  series  of  revolutions 
the  country  has  been  passing  thru.  China  also  has 
lecently  issued  a  dollar  or  yuan  weighing  26.8567  gr. 
.!)00  fine  and  is  considering  the  adoption  of  the  gold 
standard. 

The  values  of  the  various  taels  vary  with  the  price 
of  silver  and  it  is  impossible  to  give  a  fixed  equivalent, 
hut  it  is  easily  ascertained  by  multiplying  the  amount 
of  fine  silver  in  the  tael  by  the  price  of  an  ounce  of  fine 
silver.    The  Shanghai  tael  weighs  about  iHe  oz.  of 

1  Morse  in  his  "Trade  and  Administration  in  China"  mentions  seventy- 
two  varieties  of  tael.  Many  of  these  taels  are  current  only  in  remote 
ami  «llllo^t  inaci'essible  localities. 


234      DOMESTIC  AND  FOREIGN  EXCiiANGE 


standard  silver  (.925  fine)  and  is  worth  about  65  or  70 
cents.  The  K'up'ing  tael,  for  instance,  weighs  1.- 
175625  oz.  of  fine  silver;  this  at  55  cents  per  oz.  = 
1.175625  X  55  =  64.6593  cents.  The  Mexican  dollar 
also  circulates  freely.  Many  of  the  silver  coins  are 
cut  into  pieces,  which,  in  order  to  insure  their  cur- 
rency are  "chopped"  or  stamped  as  to  their  correct 
weight,  etc.,  by  some  well-known  merchant  or  banker. 
12.  Paper  currencies. — Papei*  money  issued  by  a 
government,  when  adequately  supported  by  gold  re- 
serves, is  a  most  useful  factor  in  the  finances  of  a 
country.  When  not  so  supported  it  is  likely  to  prove 
a  curse  in  the  long  run,  as  all  the  countries  that  have 
tried  it,  have  found.  Paper  money  which  cannot  he 
converted  into  cash  at  its  face  value,  but  which  never- 
theless must  be  accepted  as  representing  the  value 
printed  upon  it,  is  called  inconvertible  paper  money. 
Paper  currency  of  this  kind  is  practicallj'  a  non-in- 
terest bearing  loan  forced  upon  the  public.  The 
natural  consequence  is  that  the  more  of  it  that  is  is- 
sued, the  less  probability  there  is  of  its  ultimate  re- 
demption, and  the  more  it  depreciates  in  value.  De- 
preciation means  that  its  purchasing  power  as  com- 
pared with  that  of  gold  has  fallen,  or  diff'erently  ex- 
pressed, that  prices  as  expressed  in  paper  money  have 
risen.  If  it  requires,  for  instance,  225  paper  dollars 
to  purchase  100  gold  dollars,  gold  is  at  a  premuim  (if 
125  per  cent  and  paper  money  is  at  44%  per  cent  ot 
gold  or  at  a  discount  of  55/iii  per  cent;  or  again,  300 
per  cent  premium,  means  that  for  100  gold  dollars 


EXCHANGE  WITH  OTHER  COUNTRIES     235 

>  'ij  would  have  to  pivc  400   (300  plus  100)    i)ai)er 
(liillars. 

In  this  connection  the  following  problems  will  he 
found  interesting: 

(1)  The  premium  on  gold  is  3007o  ;  at  what  %  discount 

is  paper  money? 

,  300  X  100       30,000 

"*'*'''■" -"jooTuinoo 40<]~^^  '''•'*%  discount 

(2)  Paper  currency  is  at  a  discount  of  75%  as  com- 

pared witli  gold;  what  is  the  premium  on  tfold? 
.  lr,  X  100  7,500    '  , 

^"''''''-''^'■mr=TT—~jr  =300'/^  premium. 

The  modern  exponents  of  paper  money  currency 
liave  been  chiefly  the  South  and  Central  American  re- 
publics, the  majority  of  which,  tho  they  are  theoret- 
ically on  a  gold  basis,  are  embarrassed  by  large  quan- 
tities of  inconvertible  paper  money.  There  has  been 
a  strong  effort  of  late  years  on  the  part  of  the  more 
progressive  governments  to  put  their  currency  and 
finances  on  a  sounder  basis.  Among  these  may  be 
mentioned  Venezuela,  Uruguay,  Peru,  Ecuador, 
t'osta  Rica,  Salvador,  Honduras,  Haiti  and  Bolivia. 
The  following  countries  are  still  on  an  inconvertible 
jiaper  basis  with  a  more  or  less  fixed  premium  on 
K<'Id : 


Premium  on  gold 

Value  $100  gold 

Honduras    .  .       140.00% 

240.       paper 

Guatemala  .  .    1,500.00% 

1,600.       pap^r 

Chili    84.6  % 

184.30  paper 

Colombia   .  .  .    9,900.00% 

10,000.        paper 

Paraguay    .  .    1,400.00% 

1,500.       paper 

ill 


S36      DOMESTIC  AND  FOREIGN  EXCHANGE 


Inconvertible  paper  money  has  no  intrinsic  value 
and  its  gold  value  depends  entirely  upon  what  the 
people  of  the  country  are  willing  to  accejit  it  for  in 
exchange  for  gf)ld,  and  therefore  the  rate  of  ex- 
change between  a  country  on  an  inconvertible  paper 
basis  and  one  on  a  metallic  basis  can  only  be  arrived 
at  by  ascertaining  at  the  moment  the  amount  of  gold 
that  the  public  of  the  former  country  is  willing  to 
give  for  its  paper  unit. 

13.  Chile. — Of  the  paper  standard  countries  Chile 
is  commercially  the  most  important. 

The  monetary  system  of  Chile  is  tiieoretically  on 
a  gold  basis,  but  the  gold  standard  was  abandoned 
and  was  replaced  by  a  paper  currency.  The  theo- 
retical unit  is  the  peso  divicled  into  100  centavos.  It 
should  be  the  equivalent  of  18  pence  or  %<!  of  £l  and 
weigh  .599103  gr.  91673  fine  or  .54917  gr.  fine  gold. 
The  present  circulation  medium  consists  of  govern- 
ment notes  worth  about  9%d.— equivalent  to  a  pre- 
mium on  gold  of  84.01  per  cent.  Chile  has  recently 
authorized  its  Conversion  Office  to  issue  notes  against 
gold  at  a  fixed  rate  of  12  pence  per  peso,  which  if 
carried  out  will  place  it  on  a  gold  exchange  basis. 

Export  duties  are  payable  in  gold  at  the  rate  of 
18  pence  per  peso  or  in  drafts  o!i  London.     The  sov- 
ereign is  legal  tender  for  13y3  pesos   (13'/3  X  18 
240d.). 

Chile  quotes  ninety-day  sight  bills  on  London  at 
rales  fluctuating  between  974(1.  and  lid.  per  paper 


EXCHANGE  WITH  OTHER  COl  NTRIES      237 

pesos.     The  currency  of  one  of  these  hills  average, 
120  days  (27  days  voyage  +  90  day  +  3  days  grace) , 

REVIEW 
What  is  the  best  basis  of  exchange  and  why? 
wnat  IS  the  monetary  unit  of  the  .VethcrlanHi  >     H«™ 

"  Ho"  L"  t''""i  ''^''V  ^<>^ ^r:':^o.s  ":ir  "'"'■ 

When  *w„         T'"'  '.""  "'  ""'"""^^  ''^'"'='^"  ^<""'t"'=»  obtained  > 
Uquoted?      """■'"  ''""  ""  '''•^"''^■'■'  ''>'"^-  "^  -^"-Se,  how  U 

sS:L'i:I^J.fX:'J::7  "^-^  -"■  -'"--  *"  e«hange 

ciyp^'civraTeXle"^  ''""'  '^^^"""'^  ''-'"'  "^"  *°  » 

Wh"areffecTha",Ti  'T^^V"  T"*"*^"  '*'"'  "  ""^^  "'""•""d? 
»nat  effect  has  this  standard  on  business  in  those  countries  = 

ren"r  "*"  "■"*  ""=  disadvantages  of  pa,,;;  eur- 


CHAPTER  XVIII 


LONDON  AND  NEW  YORK  AS  FINANCIAL  CENTERS  ' 

1.  New  York  as  a  /inaiidal  center. — Since  the  be- 
ginning of  the  present  European  war  there  lias  been 
a  great  deal  of  discussion  in  the  financial  papers  and 
elsewhere  as  to  the  effect  of  the  war  on  London's  po- 
sition as  the  financial  center  of  the  world  and  the 
probability  of  New  York  succeeding  in  assuming  and 
keeping  the  position.  It  is,  of  course,  natural  that 
the  serious  interruption  in  shipping,  commerce  and 
exchange  thruout  the  world  would  minimize,  for  the 
time  being,  London's  supremacy,  especially  when  the 
stupendous  task  of  financing  not  oidy  Great  Hritains 
munition  requirements  hut  those  of  her  allies  has 
devolved  upon  her  to  so  large  an  extent. 

There  is  no  question  that  at  the  end  of  the  war. 
New  York's  position  as  an  exchange  and  financial 
center  will  be  vastly  enhanced,  but  not  necessarily  at 
the  expense  of  London.  Sovereigns  and  dollars  are 
the  only  two  important  mediums  of  exchange  that 
have  been  at  all  reliable  since  the  war  commenced, 
and  this  will  no  doubt  put  both  of  these  exchanges 
immeasurably  ahead  of  the  exchange  of  any  other 
country  at  the  end  of  the  war. 

•  This  chapter  was  oripinnlly  puMished  as  an  article  in  tlie  Annalf  til 
thf  Amrrirnn  Arnihmy  of  Political  and  Social  ticitnce,  Nov.,  1!)I«,  and  i 
reproduced  in  this  volume  with  permission  of  the  pulilishers. 

238 


FINAXCIAL  CENTERS 


asii 


i 


2.  The  reasons  for  London's  supremacy.— Ten- 
don has  been  for  centuries  the  conmiercial  clearing 
house  of  the  world.  This  is  due  not  only  to  its  cen- 
tral situation,  its  immense  foreign  trade  and  its  large 
mercantile  navy,  but  also  because,  thru  its  highly  per- 
fected banking  system,  it  provides  facilities  of  such 
magnitude  and  of  such  entire  efficiency  for  the  final 
settlement  of  exchange  operations,  that  drawers  or 
negotiators  of  bills  in  every  quarter  of  the  globe  gave 
preference  to  sterling  over  any  other  form  of  ex- 
change. It  has  been  estimated  that  nearly  ninety 
per  cent  of  all  letters  of  credit  issued  thruout  the 
world  were,  prior  to  the  war,  drawn  in  English  money. 
Lloyd  George,  in  commenting  on  the  unique  and 
commanding  position  of  Great  Britain  in  interna- 
tional trade  and  the  consequent  serious  responsibility 
placed  upon  her  at  the  outbreak  of  the  war,  said  in 
Xovember,  1914: 

We  had  not  merely  our  own  business  to  run ;  we  were  an 
.•ssential  part  of  the  machinery  that  ran  the  whole  interna- 
tional trade  of  the  world.  We  provided  the  capital  to  raise 
the  produce;  we  carried  half  the  produce,  not  merely  of  our 
own  country,  but  of  the  whole  world.  More,  we  provided 
also  the  capital  that  moved  that  produce  from  one  part  of 
the  world  to  another,  not  merely  for  ourselves,  but  for 
other  countries. 

I  ask  anyone  to  pick  up  just  one  little  bit  of  paper,  one 
I'll!  of  exchange,  to  find  out  what  we  are  doing.  Take  the 
™tton  trade  of  the  world.  The  cotton  is  moved  first  of 
all  fvom  the  plantations,  say,  to  the  Mississippi,  then  it  is 
moved  dow.  to  New  Orleans;  then  it  is  moved  from  there 
'        xvu-Tir""*"^  "'■  """*  ^'■'''''"  °'"  ^■'sowl'C'-e.     Every 


240     DOMESTIC  AND  FOREIGX  EXCHANGE 

movcmtnt  thiro  is  represented  by  a  paper  signed  either  here 
in  London  or  Manchester  or  Liverpool ;  one  signature  prac- 
tically is  responsible  for  the  whole  of  those  transactions 
Not  merely  that,  but  when  the  United  States  of  America 
bought  silk  or  tea  in  China  the  payment  was  made  thru 
London.  By  means  of  these  documents  accepted  in  London 
New  York  paid  for  the  tea  that  was  bought  from  China. 
We  were  transacting  far  more  than  the  whole  of  our  own 
business ;  we  were  transacting  half  the  business  of  the  world 
as  well  by  means  of  these  paper  transactions.  What  is  also 
important  to  establish  is  this:  that  the  paper  which  was 
issued  from  London  has  become  part  of  the  currency  of 
commerce  thruout  the  world. 

In  considering  the  possibility  of  New  York  being 
a  successful  rival  for  supremacy  as  the  exchange  and 
financial  center  of  the  world,  we  can  do  no  better 
than  review  some  of  the  principal  reasons  why  Lon- 
don has  hitherto  held  that  position  and,  it  will  be  re- 
alized, that  Xew  York  must  duplicate  these  conditions 
in  great  part  if  not  in  entirety  before  London  can  be 
detiironed.  These  reasons  and  conditions  can  be 
tabulated  briefly  under  three  headings;  physical, 
psychological  and  economic.  Those  coming  under  the 
first  heading  are  of  course  unalterable ;  those  under  tlie 
second  heading  can  be  remedied  in  time  thru  educa- 
tion and  training;  and  those  under  the  third  heading 
are  matters  of  legislation  and  custom. 

3.  Phymcal  conditions  favorable  to  London.— 
London  is  situated  on  the  thre  ;':old  of  Europe  in 
the  heart  of  the  world's  commercial  activities,  directly 
opposite  the  estuary  of  the  Scheldt  and  nearly  o])- 
posite  that  of  the  Rhine,  and  is  within  a  short  distance 


FINANCIAL  CENTERS  ui 

of  every  important  exchange  center  in  the  world  with 
the  exception  of  New  York.  This  may  be  considered 
as  an  almost  insuperable  obstacle  to  Xtw  York's  am- 
bition. 

London  has  the  advantage  of  water  lanes  free  from 
ice  and  fog  to  every  large  port  in  tlie  ^v,irld  witli  the 
exception  of  Xew  York;  the  climate  is  equable  and 
liquids  and  perishable  goods  run  little  or  no  danger 
of  freezing  in  winter. 

The  restricted  insular  area  of  (Jreat  Britain,  a  little 
larger  than  the  State  of  Minnesota,  is  also  an  import- 
ant factor,  as  it  not  only  affords  an  immense  sealioard 
con.pare.1  with  its  size,  but  concentrates  the  po,,ula- 
tion.     A  frequent  and  rapid  transit  service  makes 
Cxreat  Britain  practically  one  large  city  with  London 
as  the  business  center.     Every  bank  in  the  country 
has  a  branch  or  correspondent  in  London,  carries  its 
reserves  there  and  clears  direct  with  every  part  of 
the  country  thru  its  London  agent.     The  economy 
ot  resources  effected  by  this  natural  concentration  of 
funds  is  seldom  realized  and  is  worthy  of  study      The 
I'lsular  position  of  London  renders  "it  comparatively 
.ee  from  the  danger  of  invasion  and  seizure  by  a 
lioshle  power  and  this  immunity  has  been  a  facto^  in 
making  London  a  world  depository. 

4.  Mail  and  cable  facilities.~The  geographical  sit- 
uation of  Great  Britain,  coupled  with  her  willingness 
o  invest  money  in  international  utilities,  has  placed 
I'cr  m  a  unKjue  position  as  regards  mail  and  cable  fa- 
cilities.    Thru  her  immense  mercantile  navy,  London 


242     DOMESTIC  AND  FOREIGN  EXCHANGE 

has  direct  communication  by  fast  steamers  with  everv 
important  port  in  the  world  and  consequently  acts  as 
a  foreign  mail  clearing  house  for  all  other  countries. 
If  f'rench,  German  or  Dutch  steamers  afford  a  faster 
service  to  any  point  they  can  be  utilized  with  little  or 
no  loss  of  time. 

As  Great  Britain  owns  and  operates  two-thirds  of 
the  submarine  cable  mileage  of  the  world,  it  is  natural 
that  I.,ondon  should  be  a  great  cable  center  with  prac- 
tically direct  communication  the  world  over.  This 
service  is  now  supplemented  by  a  far  flung  system 
of  wireless  stations.  Furthermore,  under  normal 
conditions,  every  main  railroad  on  the  continent  of 
Europe  gives  its  best  service  and  equipment  to  its 
London  mail  train.  The  Trans-Siberian  Railway 
already  gives  access  by  rail  to  the  Pacific  and  it 
is  only  a.  question  of  time  before  thru  connections 
with  India,  China  and  South  Africa  will  be  estab- 
lished. 

5.  Time  advantages. — In  dealing  in  foreign  ex- 
change and  stocks  London  is  the  center  of  the  world 
as  regards  time.  She  knows  the  conditions  in  eastern 
markets  before  they  close  and  is  open  long  enough 
to  operate  in  New  York  before  her  own  markets  close. 
Her  position  is  therefore  pivotal  as  regards  time  and 
distance.  Time  is  the  essence  of  an  exchange  trans- 
action; a  day's  delay  may  turn  a  profit  into  a  loss  and, 
granting  that  New  York  has  the  means  and  enter- 
prise to  create  an  efficient  steamship  and  cable  service 
in  due  course,  how  can  she  eliminate  the  more  serious 


FINANCIAL  CENTEKS 


JW 


handicap  of  distance  by  water  from  all  other  financial 
centers? 

6.  National  cliaraitcmticii.—iireut  Britain  is  a 
land  of  slowly  accjuired  fortunes  and  the  banker  and 
merchant  there  are  content  with  small  profits  and 
slow  returns.  They  have  long  realized  the  fact  that 
trade  follows  the  loan  and  have,  therefore,  been  willing 
to  invest  money  in  foreign  countries  with  no  prosj)ect 
«{  recovering  inmiediate  returns  or  large  profits. 
'J'he  financing  of  these  loans  abroad  has  been  an  im- 
portant factor  in  making  the  London  money  market 
so  supreme.  It  is  doubtful  if  the  American  is 
adapted  temperamentally  for  operations  of  this  kind 
or  for  the  small  profits  of  the  exchange  operations 
connected  therewith.  The  United  .States  has  still  a 
vast  area  in  proportion  to  its  population,  its  natural 
resources  are  not  yet  fully  develojjed  and  it  is  a  coun- 
try of  large  and  rapidly  acquired  fortunes.  It  will, 
therefore,  be  many  years  bei'ore  the  investors  anu  en- 
trepreneurs are  forced  to  direct  their  attention  to  for- 
eign fields.  Great  Britain,  before  the  war,  invested 
over  a  billion  dollars  annually  in  foreign  enterprises 
iiiid  at  the  beginning  of  the  war  had  between  twenty 
and  thirty  billions  so  invested.  The  United  States 
at  that  time  was  a  debtor  nation  for  over  six  billion 
dollars,  and  allowing  that  some  two  billions  of  this 
amount  were  paid  off  or  absorbed  in  the  past  two 
years  of  the  war,  she  had  to  invest  nearly  twenty-five 
billions  before  she  could  be  on  an  equal  footing  with 
fireat  Britain  in  this  connection. 


S44     DOMESTIC  AND  FOREIGN  EXCHANGE 


7.  WilUngncas  to  seek  fortune  abroad. — The  a.-er- 
uge  family  of  Greut  lirituin  is  lur^e  compared  vvitli 
that  of  the  United  States  and  there  iit  httlc  room  and 
few  opportunities  at  home  for  the  younger  sons. 
This  class  of  men  finds  its  way  into  the  army,  the  navy 
and  the  mercantile  marine  and  go  ahroud  as  clerks, 
etc.,  to  foreign  and  colonial  banks  and  commercial 
houses.  The  more  venturesome,  as  soon  as  they  ac- 
quire experience,  carry  British  trade  and  prestige  t(t 
new  and  undeveloped  countries — British  suhjects  are 
found  everywhere,  no  matter  how  remote  the  place. 

The  young  American,  on  the  other  hand,  has  so 
many  opportunities  at  liome  that  there  is  little  in- 
ducement to  venture  abroad  excej)t  for  pleasure. 
He  is  probably  the  only  son  of  the  family  and  takes 
up  his  father's  business  or  is  assisted  in  setting  up  in 
business  for  himself.  If  he  goes  al>road,  he  is  not 
content  with  a  subordinate  position,  I)ut  wants  to  be 
his  own  master  and  strike  out  for  himself.  Prefer- 
ablj'  he  goes  back  to  his  home  to  do  tiiis.  We  might 
instance  the  experience  of  the  International  Uankinir 
Corporation,  a  state  bank,  chartered  in  Connecticut 
with  foreign  branches  chiefly  in  the  Orient.  This 
bank,  tho  an  American  institution,  is  manned  prin- 
cijjally  by  Englishmen.  It  will  be  interesting  to 
watch  the  personnel  of  the  staff  of  foreign  branches  of 
national  banks  established  under  the  Federal  Keservt- 
Act. 

8.  London  tciihotit  rixmls  at  home, — To  be  a  world 
center  of  finance  it  is  essential  that  a  citj'  must,  in  the 


FINANCIAL  CKNTKRS 


S45 


first  place,  he  the  tinijuestioncd  finiincial  center  of  its 
nun  contit-'v  T^ondon  is  indisputahly  recoj^nized  iis 
the  fi.  iMKi:  i  .♦  r  not  only  of  (ireat  Britain  hut  of 
the  (  .  lish  r.i-iiiiii, .  \()  {(K-al  jealousy  is  evinced  hy 
Hirn  )'i  111,  I  i\^i  jXhi],  (ijas^ow  or  other  laTj^e 
cities  >  '•  !  .  rd,'  •  >  supremacy  in  this  rejfard.  \e\v 
Vork  IN  •  .  -Mr  pal  financial  center  of  the  I'liited 
States,  hi  '  ,i  ;-  .lot  the  only  financial  center.  (  !.i- 
ca^o.  '*»'•  Louis,  San  Francisco  and  other  iniooiKint 
centers  are  strong  « inpetitors  with  \ew  .'firk  I,  r 
domestic,  and  to  a  certain  extent  for  fon  i/n.  hijsi- 
iiess.  Aside  from  sectional  jealnusy,  tin  vast  ari-t 
of  the  United  States  makes  this  compeliti.n  in- 
evitable. Will  these  cities  abandon  selfish  moli\is 
and  aid  Xew  York  in  her  ambition?  Will  not  tlie 
expansion  of  the  country's  forei^  trade  accentuate 
rather  than  diminish  this  competition?  Chicago  and 
Minneapolis  will  share  in  the  development  of  the 
Kreat  Canadian  West;  San  Francisco  will  become 
more  important  with  the  extension  of  business  with 
tlie  Orient,  and  Xew  Orleans  will  benefit  hy  the  open- 
in^r  of  the  Panama  Canal  and  the  expansion  of  trade 
with  South  America.  The  United  States  is  not  a 
country  but  a  collection  of  countries  or  common- 
wealths of  which  Xew  York  State  is  only  one.  The 
tendency  is  to  minimize  Xew  York's  financial  su- 
premacy rather  than  to  assist  it.  A  study  of  th- 
discussions  on  this  feature,  preceding  the  passing  of 
the  present  Inderal  Reserve  Act,  will  bear  out  this 
statement. 


246     DOMESTIC  AND  FOREIGN  EXCHANGE 


London's  supremacy  is  the  cumulative  result  of  nu- 
merous forces,  political  as  well  as  economic,  spread 
over  a  long  series  of  years  dui'ing  which  time  the 
world  has  learned  to  think  in  terms  of  British  money 
and  the  bills  of  exchange  on  London  have  been  raised 
almost  to  the  dignity  of  an  international  currency, 
while  the  safety  of  the  Bank  of  England  and  the  value 
attached  to  the  word  "sterling"  have  become  pro- 
verbial. Sovereigns,  and  to  a  great  extent  Bank  of 
England  notes,  are  current  the  world  ovor  without 
recourse  to  money  changers.  The  dollar  and  the  dol- 
lar bill  must  be  made  equally  well-known  and  ac- 
ceptable. 

9.  Influence  of  custom  and  tradition. — It  must 
not  be  overlooked  that,  when  an  international  busi- 
ness is  so  long  established  and  well  centralized  as 
the  money  market  of  London,  the  world  will  con- 
tinue to  use  it  as  a  matter  of  convenience  irrespecii^  j 
of  the  possibly  superior  facilities  of  New  York.  The 
financial  roads  to  London  are  well  defined  by  mucli 
travel,  and  business  tradition  will  favor  the  old  stand, 
for  such  is  human  nature. 

One  of  the  main  foundations  upon  which  London's 
position  rests  is  the  world's  estimation  of  its  credit. 
This  credit  is  tried  and  sound,  backed  by  great  re- 
sources, and  has  been  reared  upon  the  trust  and  con- 
fidence in  the  honorable  tradition  of  British  business 
ethics.  It  is  unlikely  that  the  world  will  have  cause 
to  revise  its  opinion  after  the  war  is  over. 

10.  Economic  factors  in  London's  imsition, — The 


FIXANCIAL  CENTERS 


217 


principal  economic  factors  wiiich  tend  to  enhance 
London's  position  as  a  financial  center  may  be  con- 
sidered under  the  following  heads: 

Frie  Gold  Market 

Liquid  Discount  Market 

Stability  of  Monej  Hates 

Immense  Mercantile  Navy 

Great  Foreign  Export  and  Import  Trade 

Tariff 

Excellent  Banking  Systems  at  Home  and  Abroad 

The  Numerous  Branches  of  Foreign  and  Colonial  Banks 

Established  in  London 
Freedom  from  I'nnics  and  Financial  Disturbance 
Free  Navigation  Laws 
Marine  Insurance,  etc.,  and  reliable  Ship  Kegistration 

11.  Free  gold  market.— Oi  the  four  great  ex- 
change centers  of  the  world,  London,  New  York, 
Paris  and  Berlin,  London  is  the  only  one  that  can  al- 
ways be  depended  upon  to  meet  every  legitimate 
trade  demand  for  gold,  which  means  that  there  is  no 
delay  or  premium  entailed  in  realizing  gold  on  a  bill 
expressed  in  English  money.  It  i:j  payable  in  pounds 
sterling  which  represent  a  definite  and  immutable 
weight  of  fine  gold.  Great  Britain  adopted  the  gold 
standard  unequivocally  in  1816,  over  one  hundred 
\ears  ago,  and  has  not  departed  from  it  since,  even 
to  the  extent  of  charging  a  fractional  premium  on 
H;nld  or  by  restricting  its  export  by  legal  or  senti- 
mental embargoes.  Even  war  conditions  did  not  de- 
prive the  Englishman  of  the  privilege  of  converting 
Hank  of  England  notes  into  gold. 


248     DOMESTIC  AND  FOREIGN  EXCHANGE 

The  Bank  of  France  always  reserves  the  right  to 
pay  in  either  gold  or  silver  in  order  that  in  times  of 
stress  it  could  charge  a  premium  on  gold.  The  Im- 
perial Bank  of  Germany,  tho  theoretically  obliged  to 
pay  gold,  makes  it  very  uncomfortable  for  any  bank 
or  customer  who  has  the  temerity  to  demand  gold  for 
export  purposes.  Both  France  and  Germany,  since 
the  war,  have  abandoned  any  attemjit  to  maintain  a 
gold  basis. 

New  York,  tho  generally  willing  to  part  with  gold 
for  export  purposes,  was— at  least  up  to  the  estab- 
lishment of  the  Federal  Reserve  system— handi- 
capped by  the  lack  of  machinery  for  tlie  efficient  and 
economical  mobilization  and  control  of  tlie  gold  re- 
serves of  the  country. 

England  is  not  only  committed  to  an  undeviating 
policy  to  maintain  a  free  gold  market  but  enjoys 
peculiar  advantages  in  this  connection.  Great  Brit- 
ain is  not  only  the  largest  creditor  nation  of  the 
world  but  also  controls  and  supplies,  within  the  Brit- 
ish J^mpire,  nearly  two-thirds  of  the  raw  gold  out- 
put of  the  world  and  has  the  control  automatically, 
independent  of  any  exchange  movements,  of  over 
$350,000,000  wortli  of  newly  mined  gold  each  year. 
Owing  to  this  gold  income  Great  Britain  has  been 
able  to  maintain  her  position  as  a  free  gold  market 
during  the  whole  period  of  the  war  and  its  bank 
and  treasury  notes  have  been,  and  still  are,  redeemable 
in  gold  at  the  Bank  of  P^ngland  on  presentation. 
It  is  true,  that  since  the  war,  London's  activities  as 


FINANCIAL  CENTERS  219 

an  international  gold  market  have  heen  curtailed  ow- 
ing  to  the  disturbances  in  trade  routes  and  the  difficul- 
ties and  risks  of  ocean  transportation,  but,  so  impor- 
tant IS  the  certaint>'  of  the  English  monetary  standard 
and  financial  policy  to  the  merchants  and  brokers  of 
the  world,  that  it  is  unlikely  that  the  war  will  cause 
more  than  a  temporary  recourse  to  other  methods  of 
settling  international  obligations. 

12.  Liquid  discount  market— The  natural  com- 
plement of  a  free  gold  market  is  a  liquid  monev  mar- 
ket capable  of  absorbing  bills  of  exchange  to  an  al- 
most unlimited  amount.  This  unique  feature  of  the 
London  market  makes  a  first-class  bill  of  exchange 
on  London  as  acceptable  as  gold.  The  strength  and 
broadness  of  the  London  market,  apart  from  the  nat- 
ural resources  of  the  ronntry,  lie  in  the  ebb  and  flow 
of  foreign  capital  thru  the  machinery  of  the  branches 
<.f  foreign  and  coloi.  al  banks  established  there. 

Altho  London  do-^s  not  particularly  encourage  the 
establishment  of  foreign  banks,  it,  on  the  other  hand 
i"cs  iiotliing  to  restrict  the  movement  and  allows  free- 
dom m  banking  privileges  to  all  comers  of  good  stand- 
ing. This  broadminded  policy,  tho  it  perhaps  alTects 
to  a  certain  extent  the  individual  interests  of  some  of 
lie  British  banks,  is  recognized  as  of  great  importance 
to  London  and  the  country  in  general,  and  therefore 
in<lirectly  to  the  iianks  themselves.  These  branches 
of  foreign  banks,  with  their  network  of  correspond- 
ents thruout  the  world,  in  addition  to  their  direct  in- 
fluence on  the  exchange  situation,  give  invaluable  as- 


/JM 


850      DOMESTIC  AND  FOREIGN  EXCHANGE 


m 


sistance  to  the  Bank  of  England  in  preserving  tiie 
equilibrium  of  the  money  market. 

The  policy  of  New  York  in  connection  with  foreign 
banks  is  just  the  reverse  of  that  of  London  and  is  ap- 
parently based  on  a  local  and  narrow  point  of  view. 
New  York  bankers  have  always  discouraged  the  es- 
tablishment of  foreign  hanks  in  their  midst  and  have 
evoked  state  legislation  and  other  means  to  this  end. 
A  few  foreign  banks  are  represented  by  agents,  not 
by  branches.  They  cannot  take  deposits  or  discount 
conmiereial  jiaper  and  their  activities  are  practically 
restricted  to  making  call  loans  and  dealing  in  foreign 
exchange. 

The  London  discount  rates  are  controlled  by  a  cen- 
tral institution,  the  Bank  of  England,  and  changes  in 
the  rate  are  not  only  infrequent  but  seldom  rise  al)ovc 
six  per  cent.  By  this  control  of  the  money  market 
thru  the  bank  rate,  as  it  is  called,  the  Bank  of  England 
lias  been  able  to  attract  gold  to  London  by  raising  tlii' 
/ate  whenever  tlie  exigencies  of  commerce  and  the  ex- 
hange  situation  require  it. 

Keference  has  already  been  made  to  the  ability  and 
willingness  of  Great  Britain  to  invest  its  large  surplus 
income  in  foreign  and  colonial  securities  and  thus  pro- 
vide foreign  countries  witli  the  means  of  paying  for 
British  merchandise  and  machinery.  The  movement 
of  such  investments  forms  a  large  part  of  the  so-called 
invisible  exports  and  imports  and  is  necessarily  an 
important  factor  in  creating  exchange  and  adjustin;^ 
international  balances. 


LWw^AnsrMjmk' 


FINANCIAL  CENTERS  gsi 

13.  Mercantile  navy  and  tariff.— The  absence  of  a 
tariff  in  Great  Britjiin,  except  on  a  few  specific  arti- 
cles, is  of  great  importance,  liecause  not  only  do  for- 
eign goods  find  a  ready  market,  but  it  permits  Kritish 
merchants  and  others  to  import  goods  into  Great 
Britain  free  of  duty  and  export  them  at  their  con- 
venience.    London  and  the  other  important  seaports 
of  Great  Britain  correspond  to  the  freight  vards  at 
railway  centers.    Cargoes  consisting  of  g<«,ds  of  every 
<lescription  pour  into  these  ports  from  all  parts  of  the 
world  and  are  there  sorted  into  mixed  cargoes  to  be 
dispatched   to   various   countries.     In    other   words, 
London  also  acts  as  a  clearing  house  for  cargoes. 

The  United  States  is  so  irrevocably  committed  to  a 
high  tariff  that  it  is  unlikely  that  any  appreciable  mod- 
ification will  be  possible  for  some  time  to  come,  tho 
this  obstacle  in  New  York's  path  might  be  removed 
m  great  measure  by  the  establishment  of  free  ports. 
Large  amounts  of  British  capital  have  been  in- 
vested in  the  establishment  of  banks  in  British 
colonies  and  in  foreign  countries  with  head  offices  in 
London,  and  these  render  invaluable  assistance  in  the 
operation  and  pre.ervation  of  British  foreign  trade 
and  conunerce. 

Great  Britain  possesses  a  mercantile  navv  second  to 
none  in  the  world.  This  not  only  means  an  immense 
tiill  on  the  world's  commerce  in  the  way  of  freight,  etc., 
hut  also  enables  Great  Britain  to  govern  to  a  great  ex- 
tent the  destination  of  cargoes.  Incidentally,  because 
of  her  large  shipowning.  Great  Britain  is  naturally 


252     DOMESTIC  AND  FOREIGN  EXCHANGE 


interested  in  marine  insurance,  and  owing  to  the  ex- 
cellent standing  of  her  insurance  companies  does 
an  immense  business  in  foreign  marine  insurance. 
Lloyd's,  an  association  of  English  underwriters  of 
marine  insurance,  collects  and  distributes  by  cal)le  re- 
liable maritime  intelligence  thru  its  agencies  estab- 
lished in  every  part  of  the  globe;  it  also  issues  Lloyd's 
Register,  giving  the  rating,  etc.,  r.f  every  British  and 
foreign  ship. 

British  navigation  and  shipping  laws  are  liberal. 
A  foreign  ship  is  in  the  same  position  as  a  British 
ship  with  regard  to  British  trade,  and  foreign  siiips 
engaged  in  the  coasting  trade  are  not  subjected  to 
higher  port  rates  than  British  ships  (141  Custom  Law 
Consolidation  Act  1870).  British  law  affords  equi- 
table protection  both  to  British  and  foreign  seamen, 
but  avoids  emasculating  the  service  by  undue  pater- 
nalism. 

The  navigation  laws  of  the  United  States  have  al- 
ways been  a  serious  handicap  to  her  shipping  business 
and  the  Seamen's  Law  will  still  further  embarrass 
the  American  ship  owner. 

14.  IJiif/laiid's  foreign  trade. — I'ndcr  normal  con- 
ditions Great  Britain  has  an  inunense  export  and  im- 
port trade  with  every  part  of  the  world.  This  gre:it 
commerce  is  not  only  of  material  benefit  to  the  country 
generally  but  the  constant  flow  of  inward  and  out- 
ward remittances  forms  an  invaluable  nucleus  fir 
London's  foreign  exchange  operations,  and  bills  '  f 
exchange  can  be  bought  and  sold  in  I>ondon  drawn  vu 


II 


^^'W^ 


L'^BLjaiiKii 


•.^f      m   a\mt\ny\\Mi 


FLVANCIAL  CENTERS  c,,-,3 

any  place  in  the  world,  no  matter  how  remote  For 
the  year  ending  December  31,  1913,  the  imports  of 

lllfJot'^  ""■'  ^''^''^''^^'  «^«'"n.st  exports  of 
i634.820,326  representmg  shipments  from  and  to 
every  country  of  the  world.  At  the  end  of  1915  ex- 
cuding  certain  goods  belonging  to  the  British 'and 
allied  governments,  the  figures  for  which  are  not  avail- 

o1  J'sf/rXo'  T"  f  ^«^'***'*^'»  «^'-'nst  imports 
of  £853,756,279  a  shrinkage  of  about  23  per  cent      It 

the  bulk  of  her  export  trade  notwithstanding  war  con- 
ditions and  the  shortage  of  bottoms 

Great  Britain  has  a  fully  developed  banking  sys- 
tem, eminently  adapted  to  the  requirements  of  her  in- 
ternational trade  and  finance,  which  has  been  ably  and 
successfully  conducted  thru  a  long  series  of  years  by 
Jnghly  trained  bankers,  i„  whose  judgment  and  con- 
erv-atism  the  British  public  have  every  confidence, 
t  onsequently  the  country  is  practically  immune  from 
panics  and  other  financial  disturbances.     The  bank- 
ing laws  are  simple  and  impose  no  unwise  restrictions 
as  to  legal  reserves,  etc.,  leaving  such  .piestions  to  the 
individual  judgment  of  the  banks  themselves      Kx,,e 
r-ence  has  shown  that  good  hanking  is  obtained  not 
«.  much  by  good  laws  as  by  good  bunkers. 

to^^w  .r?  "T  '■"""';'  '"■"'"•^'  *'"^  ''■•'"^•'p«'  '•^«^""« 

»_iicli  London  owes  her  financial  supremacy,  and 
tlio  he  events  of  the  past  few  years  have  brought  Xew 
\  ork  into  a  position  of  financial  eminence  and  power 
it  remains  to  be  seen  how  much  of  this  power  has  been 


854      DOMESTIC  AND  FOREIGN  EXCHANGE 


thrust  upon  her  temporarily  and  how  much  she  lias 
acquired  permanently,  at  the  expense  of  London. 

15.  New  York'n  prsent  dominance  temporary.— 
Since  the  war  commenced  the  United  States  has  grad- 
ually changed  from  a  debtor  to  a  creditor  nation,  prin- 
cipally owing  to  the  fact  that  vast  exports  of  muni- 
tions, etc.,  have  been  made  ia  belligerent  countries, 
thus  creating  an  abnormal  trade  '  ■  lance  in  her  favor. 
With  this  shifting  of  internn  i  tial  balances,  large 
amounts  of  gold  have  been  received  from  debtor  na- 
tions, a  considerable  volume  of  American  securities 
held  abroad  have  been  absorbed  by  the  New  York 
market  and  large  loans  made  to  the  belligerent  na- 
tions, as  well  as  to  Canada  and  other  countries  of  tin- 
American  continents. 

Owing  to  the  position  the  United  States  then  had  as 
a  wealthy  neutral  nation,  far  removed  from  the  scene 
of  conflict,  a  wide  demand  also  developerl  for  dollar 
exchange  and  dollar  credits,  not  only  in  the  United 
States  but  in  foreign  countries.  In  other  words,  tlit 
abnormal  conditions  induced  by  the  war  called  upon 
New  York  to  take  the  position  of  international  bank- 
ers heretofore  played  almost  exclusively  by  London. 
This  role  was  assumed  by  New  York,  not  so  much  by 
her  own  volition  as  by  force  of  circumstances.  Will 
these  war  time  opportunities,  when  peace  is  declared, 
be  sufficient  to  retain  for  New  York  the  position  which 
London  with  all  her  advantages  took  centuries  to  ac- 
quire:' liefoie  New  York  can  do  this  to  any  gi-eat 
extent  the  United  States  must  learn  to  think  interna- 


FINANCIAL  CENTERS 


ir>s 


tionally  and  not  provincially.  It  must  increase  its 
foreign  trade  tremendously  and  revise  its  navif,'ation 
and  alien  labor  laws  and  its  tariff,  all  with  a  due  re- 
gard to  the  comity  of  nations;  sound  permanent  l)aMk- 
ing  and  currency  system,  removed  from  legislative 
tinkering  must  also  be  established,  and  finally  foreign 
banks  should  be  encouraged  to  establish  branches  in 
Xew  York  and  other  centers  without  unnecessary  re- 
strictions as  to  the  business  they  may  undertake. 

On  good  authority  the  opinion  is  often  given  that 
the  financial  center  of  the  world  will  always  remain  in 
Europe,  if  only  for  geographical  and  national  reasons, 
l)ut  there  is  need  and  room  for  another  strong  financial 
center  in  addition  to  London  and  it  would  always  be 
desirable  that  such  an  alternative  should  not  be  lo- 
cated in  Europe,  as  the  recent  European  crisis  has 
amply  demonstrated. 

16.  New  York's  future.— 'Sew  York  is  already 
the  financial  center  of  the  new  world;  she  should 
strengtlien  and  broaden  her  claim  to  this  position  and, 
.IS  a  coadjutor,  relieve  and  assist  London  in  her  great 
responsibility  as  the  world  center.  In  the  reconstruc- 
tion that  must  follow  the  close  of  the  war,  (Jicat  Hrit- 
ain  and  the  United  States  will  undoubtedly  piny  a 
filial  jiart  and  London  and  Xew  'N'ork  will  find  it 
more  and  more  necessary  to  cooperate  in  tlie  perform- 
ance of  their  several  functions. 

Xew  York  will  doubtless  benefit  permanently  from 
tlie  advantages  and  experience  gained  during  the  war. 

Cireat  Britain  will  profit  also  from  the  intimate  inter- 

xvir  18 


256     DOMESTIC  AND  FOREIGN  EXCHANGE 

course  with  France,  Italy  and  Russia,  likely  to  result 
from  the  war  which  will  undoubtedly  tend  to  reestab- 
lish, if  not  strengthen,  London  in  her  former  position. 
Great  Britain  has  financed  her  allies  generously  tlu"u 
the  war  and  will  not  only  have  these  large  amounts  re- 
funded to  her  in  due  course  but  will  receive  collateral 
advantages  which  should  more  than  offset  the  business 
lost  to  New  York. 


REVIEW 

What  has  made  London  the  commercial  clearing  house  of  the 
world  ? 

Discuss  some  of  the  conditions  favorable  to  London's  position 
as  a  financial  center? 

What  are  the  principal  economic  factors  which  help  to  enhance 
London's  position  as  a  financial  center? 

What  chanf^s  must  the  United  States  make  in  order  that  New 
York  may  hold  the  financial  position  gained  as  a  result  of  the 
European  war? 


CHAPTER  XIX 

WAR  AMI)  THE  EXCHANGES 

1.  Wcr  and  Us  effect  on  international  exchange- 
Exchange  operations  in  the  preceding  pages  have 
been  considered  almost  entirely  fV-.n.  the  viewpoint  of 
normal  conditions,  a^  it  is  safe  to  assume  that,  with 
the  return  of  peace,  international  exchange  will  re- 
sume Its  onlinary  channels.  A  hriof  review,  however, 
<>t  the  manner  in  which  the  war  has  affected  the  ex- 
changes may  be  interesting  as  well  as  instructive 

A    prominent    Xew    York    banker,    Mr.    Albert 
Strauss,  once  referred  to  foreign  exchange  as  "an 
economic  mechanism  automatically  making  .lelicate 
mternational  adjustments."     The  full  significance  of 
this  terse  definition  has  never  been  more  fully  realized 
than  in  those  fateful  days  of  early  August    1»U 
when  the  mailed  fist  of  war  fell  and  completely  par- 
al.\zed  the  credit  machinery  of  the  world.     The  very 
perfection  of  the  international  credit  machinen-  with 
•ts  vast  network  of  telegraphic  nerves  radiating  fn,m 
London,  Xew  York,  Paris,  Berlin  and  other  financial 
Sangha  was  a  factor  in  its  own  undoing.     Cable  com- 
numication  was  practically  cut  off  by  the  destruction 
ot  some  of  the  cables  and  by  the  establishment  of  cen- 
sorships, and  the  little  news  that  did  succeed  in  filter- 

2.-.7 


MIOOCOPY   RESOLUTION   TEST   CHART 

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r.^S  (716)   482  -  0300  -  Phone 

^^  (716)   288  -  59S9  -  Fa. 


258      DOMESTIC  AND  FOREIGN  EXCHANGE 

in^'  thru  was  abiiost  unbelievable,  so  terrific  was  its 
sifrnificance. 

Events  followed  each  other  in   rapid  succession. 
Austria  declared  war  on  Servia,  July  28,  and  Kus- 
sia.   Germany  and  France  began  to  mobilize.     On 
July  30,  the  Eank  of  England  rate  was  raised  to 
four  per  cent,  and  on  July  31,  to  eight  per  cent.     On 
the  same  day,  unable  to  withstand  the  flood  of  conti- 
nental   liquidation,    the    London    Stock    Exchange 
closed,  and  a  like  course  was  soon  followed  by  the 
New  York  Stock  Exchange  and  by  every  bourse  in 
the  wo  "Id.     On  August  1,  Germany  declared  war 
on  Russia  and  the  Bank  of  EnglandVate  was  raised 
to  ten  per  cent.     On  August  3,  Germanv  declared 
war  on  France.     This  was  followed  by  a  run  on  the 
Hank  of  England,  and  on  August  5,  England  de- 
clared war  on  Germany.     Europe  was  panic-stricken, 
specie  i)ayments  were  suspended  and  moratoria  were 
being  declared  everj'where.     I  or  a  time  all  was  con- 
fusion until  the  energetic  and  courageous  action  of  the 
British  government,  assisted  by  the  remedial  meas- 
ures resorted  to  at  other  exchange  centers,  brought 
some  order  out  of  chaos  and,  to  a  certain  degree,  re- 
stored confidence. 

During  the  first  week  of  August  the  world's  finan- 
ciers laced  conditions  that  were  absolutely  unprece- 
dented and  to  which  the  generally  accepted  remedies 
or  economic  theories  were  inapplicable.  Friends  of 
peace,  who  scoffed  at  the  jrossibility  of  a  great  Euro- 
pean war  and  the  necessity  of  preparedness,  received 


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WAR  AND  Tin;  EX('iiA\(;i:s  .,.j.) 

a  rude  awakininfr.  as  the  very  inter-iational.  financial 
and  eoininereial  interests  <,ii  whieii  tliev  relied  s.,  lully 
to  avert  this  war  were  the  very  first  to  fall  vi.li.ns  to 
Its  destrnetive  ii.iliienee.  The  first  weeiv  of  .Vu-ust, 
1!)14.  found  the  world's  "msiness  e()nii)letelv  [.araly/ccl 
and  It  will  he  interesting  to  study  the  various  expedi- 
ents used  in  the  endeavor  to  repair  and  sui)p.Mt  the 
inaehinery  of  credit. 

The  wliole  suh.jeet  of  forei«-n  exeiian^re  siiuv  the 
l«cKin',,nA'of  the  war  is  most  complex  and,  in  this  hrief 
leview,  we  have  referred  oidy  to  the  more  outstanding- 
and  evident  effects,  without  attempting  to  exj)Iain  all 
tile  causes.  To  do  so  would  rcpiire  an  exi.anstive 
study  of  the  internal  conditions  of  each  country 
largely  a  matter  of  conjecture  at  the  present  time.' 
It  IS  hoped,  however,  that  sufficient  has  heen  said  to 
make  the  accomi)anying  chart  intelligihle  and  iussist 
the  reader  in  realizing  the  existence  of  the  many 
mystenou.s  and  undisclosed  influences  proceeding 
from  the  economic  pressure  exerted  hv  the  war  upon 
the  financial  centers  of  the  world. 

2.  .l/ora^om.— Moi-atorium  is  a  Latin  word  signi- 
fying delay.  It  is  an  extension  of  time  for  tlie  pay- 
ment of  dehts  allowed,  under  exceptional  cireun"i- 
stances,  by  the  government  of  a  countrv;  in  other 
words,  it  is  an  extension  of  the  days  of  grace.  Dur- 
ing the  Franco-German  war  of  1870.  a  French  mora- 
tory law  was  passed  extending  the  maturity  of  bills 
for  three  months. 
At  the  beginning  of  the  war,  the  majority  of  the 


260      DOMESTIC  AND  FORKIGN  EXCHANGK 


coiiiitiifs  of  tlie  world  found  themselves  with  a  large 
amount  of  rioating  and  maturing  indebtedness  to  pro- 
vide for  in  London,  and  without  any  maehinery  for 
accomplishing  it,  except  at  an  almost  prohibitive  loss. 
So  dependent  had  the  world  become  on  the  facilities 
offered  by  London  and  other  large  European  centers 
for  the  adjustment  of  their  trade  balances  between 
one  another,  that  the  complete  breakdown  in  tlie  ex- 
changes left  them  with  no  chaimels  whereby  they  could 
offset  these  balances  except  by  direct  settlement,  either 
by  gold  shipments  or  the  purchase  of  exchange  in  a 
debtor  country  for  remittance  to  a  creditor  nation, 
both  costly  methods.  Conditions  were  {"urther  com- 
plicated by  the  uncertainty  of  comnmnication  and  the 
almost  complete  cessation  of  merchant  shipping  thru- 
out  the  world  owing  to  internment  or  commandeering. 
For  these  and  other  reasons,  one  country  after  another 
declared  a  moratorium  of  a  more  or  less  general  na- 
ture.    Among  these  may  be  mentioned: 

C'oiinlry  Date 

Argentina August  12 

Belgium    "  6 

Brazil   «        16 

Bulgaria "  7 

Denmark     "        21 

Ecuador   "  7 

Egypt "  9 

Grocce July  26  — August     4 

Italy   August     4 

Norway     "  6 

Paraguay "         14 

Portugaf "        24 


WAK  AND  THK  EX(  IIANCiKS  «6i 

^"*"';"   • 'iil.v  yo  -  -August     9 

South  Africa SptrmlHT  15 

T't'\-, '^"«"^'      ' 

hwitzcrlnrid     »         j- 

Tiirkoy .i  .1 

Uni^imv     i.         jij 

Great  lirit.-iin  declared  a  nioratnriiim  for  liills  of 
exchange  on  August  2,  1914,  in  order  to  pn.ttit 
the  credit  of  the  acce.iting  liouses  until  thev  were  aidr 
to  secure  rennttances  from  abroad  from  tlic  i)riniary 
ohiigants.  As  this  limited  moratorium  was  found  to 
affect  adversely  the  position  of  domestic  bills,  the  mor- 
atorium was  made  general  on  August  7  and  this 
action,  by  affording  temporary  protection  to  the  com- 
munity at  large,  allayed  any  feeling  of  panic  and 
possibly  prevented  runs  on  the  banks.  The  mora- 
torium was  only  tempf)rary  and  was  removed  before 
the  end  of  the  year.  It  should  be  noted  that,  at  no 
time  since  the  beginning  of  the  war,  has  the  Bank  of 
England  ceased  to  redeem  its  notes  in  gold. 

Germany  declared  no  moratorium  in  name,  but 
coolly  stopped  payment,  as  far  as  her  foreign  debts 
were  concerned,  and  paid  her  domestic  debts  with  copi- 
ous additions  to  her  paper  money.  Immediately  on 
the  declaration  of  hostilities  Germany  suspended  the 
gold  redemption  of  the  Reichsbank's  "notes  and,  a  few 
months  later,  made  it  a  penal  offense  to  buy  or  sell 
gold  at  a  premium.  These  exactions  are  far  more 
restrictive  than  a  temporary  moratorium  on  private 
bills,  and  reflect  more  seriously  on  the  financial  condi- 
tion of  a  country. 


86i!      DOMKSTIC  AND  FOKKUiN  KXCIlANGi; 


3.  London  and  Sevc  Vor'  — I'lider  tiurniul  condi- 
tions certain  of  the  exchanges  tend  to  fluctuate  in 
j^roups,  but  since  tl.^  war  economic  conditions  liave 
been  so  altered  that  these  j^roups  have  broken  up  and 
rearranged  tlieniselves  into  three  entirely  new  |<roups, 
namely,  (ireat  Britain  and  her  allies,  Germany  and 
her  allies,  and  the  other  neutril  countries. 

Hy  far  the  largest  and  most  important  exchange 
operations  since  the  war  have  taken  place  between 
Great  Britain  and  the  United  States.  We  shall 
briefly  review  the  course  of  exchange  between  London 
and  New  York  since  August,  lOl*. 

During  the  month  of  July,  1914,  Xew  York's  ad- 
verse trade  balance  with  Great  Britain  was  still  fur- 
ther increased  by  the  abnormal  (juantity  of  Ameri- 
can stocks  and  bonds  licjuidated  on  the  New  York 
Stock  Exchange  for  European  account,  and  selling 
grew  in  intensity  with  the  closing  of  the  European 
bourses.  The  climax  was  reached  on  July  30,  with 
the  closing  of  the  London  Stock  Exchange,  which 
caused  the  Xew  York  Stock  Exchange  to  close  its 
doors  in  self-defense  on  the  following  day. 

At  the  beginning  of  the  war  New  York,  therefore, 
found  itself  with  an  unprecedented  floating  indebted- 
ness to  Europe  estimated  at  from  $2.)0,000,000  to 
$300,000,000.  As  a  result  exchange  became  utterly 
demoralized  and  practically  disappeared.  Cables  on 
London  rose  to  $.'),  to  $6.50  and  finally  to  $7,  and  quo- 
tations became  unworkable. 


WAH  AM)  Till.;  i;xciiA.\(ii;s  a,w 

4.  Gold  HhipmcntH  from  \nc  y»rk:~(.l„Ul  hud 
Ikom  leaving  \ew  V„rk  in  Ur^v  (|iiuntit.cs  .lurii.K  the 
month  of  July.  a,„l  ,„<„r  w.uihj  have  hwn  shipptd 
iHit  for  the  Middeimess  of  tlie  crisis.  Kveii  as  hite  as 
July  28,  1!)14,  the  Kronprinzcm,!  Ccvilk  sailed  fr  ii 
\ew  Vork  with  a  eonsi^nnient  of  j^old  valued  at  o^er 
*10.()00,000.  hut  to  avoid  eapture  was  reealle.l  when 
almost  It.  si^ht  of  Knpland.  and  put  haek  into  Bar 
Harbor,  Maine,  on  Au^'ust  \,  lOU. 

CJold  shipnitiits  thru  other  ehanncls  were  impraeti- 
eahle.  not  only  on  account  of  the  hi^'ii  war  insurance 
rate  of  over  one  per  cent  hut  also  due  to  tiie  fact  that 
It  was  evidently  not  considered  a(h  isahle  or  expedient 
for  even  neutral  nations  to  shij)  frold  in  war  time. 
Kvery  nation  was  holding  K<'1<1  for  eventualities— they 
knew  not  what.  I'nder  normal  conditions.  New  York 
would  havf  been  able  to  correct  lliN  ahi  .rmal  ex- 
eiian^e  position  by  anticipating?  the  fall  ^  pmeiits  of 
cotton,  ^rain  and  other  produce  by  the  ust  )f  finance 
l)ills.  This  was  not  possible  at  the  outi  •!<  of  [lie 
war,  tho  later  on,  when  the  crops  were  i,  ,     har- 

vested and  shipping  became  less  disorKaiii/  ;f,e  vast 
exports  from  the  United  States  speedily  c(.rr  cted  the 
exchanges  and  reversed  the  position. 

3.  Payments  thru,  Otta'xa.— On  August  l,     1914, 
in  order  to  assist  the  Xew  York  exchange  sit,  ...  'm. 
the  Bank  of  England  signified   its  willingtu 
make  payments  in  London  on  Xew  York  ac( 
against  the  deposit  of  an  equivalent  amount  in  g^d 
at  Ottawa,  thus  eliminating  the  dangers  and  ex- 


264      DO.\Ii:STlC  AND  FOUKUJ.V  EXCHANGE 


IKiise  of  an  ocean  shipment.  This  nrranpenicnt  was 
e(iuivalent  to  openinK  a  huj^e  ciedit  in  London,  lim- 
ited only  hy  the  willin^'ness  of  the  New  York  hanks 
to  part  with  j^oid.  Shipments  variously  estimated  at 
from  $100,000,000  tt)  $1.)0,000,000  were  made  and 
under  their  influence  exchange  was  stahili/.ed  u  til 
the  effect  of  the  fall  shipments  made  itself  felt. 

The  corrective  measure  referred  to  above,  aided  by 
the  constantly  increasing  volume  of  Ame  .an  imports 
to  Great  Britain  and  her  allies,  gradually  forced  the 
rate  down  until  par  was  reached  in  Xoveniber  and 
finally  passed  about  the  middle  of  December,  1914. 
From  then  exchange  went  steadily  in  favor  of  N  v 
York,  the  lowest  point,  $4..)0  per  £,  being  reachea  in 
the  following  August,  equivalent  to  a  discount  of 
7  per  cent. 

During  the  first  eight  months  of  1915,  Great  Britain 
made  large  shipments  of  gold  and  securities  from 
London,  including  the  amount  held  in  Ottawa  for  the 
account  of  the  Hank  of  England,  but  these  remit- 
tances were  not  sufficient  to  offset  the  unprecedented 
exports  of  munitions  of  war  and  food  products  to 
Great  Britain  and  her  Allies,  amounting  to  over 
$100,000,000  per  month. 

6.  New  York  loans  to  Great  Britain. — It  was  not 
until  after  the  low  point  was  reached  in  August  that 
the  British  Government  appeared  to  realize  the  seri- 
ousness of  the  exchange  situation  and  took  the  obvious 
and  efficient  method  of  correcting  the  rate  by  arrang- 
ing the  Anglo-French  loan  of  $500,000,000.     This 


WAIt  AM)  Tin:  I.X(  HA\(;i;s  065 

•iction.  h<.wever.  liad  het-ii  ,ltl     cd  too  loti^  to  In-  vtrv 
tffectixc  und  tho  it  (lid  arrest  tlif  <lownward  trctni. 
turther  assistaiicf  was  iiwessary.     Additional   sliij)- 
iiieiits  of  «ol,l  and  smirities.  aided  l,v  loans  arran-red 
l)etween  the  London  an<l  \ew  \'ork  hanks,  «radiiTily 
iiidiieed  an  iipwa-.l  inovenKiit  uhieh  wa    lurtlur  ,ii|). 
ported  hy  the  n  .1.  .ization  of  Aineriean  seeuriti.s  in 
l-ondon  hy  the  Imperial  government  for  the  |)iirpose 
of  ohtaininK  further  eredit  from  \ew  Wu  k,  if  neees- 
sary.     Tnder    these    ijiHueiiees    sterling    exehanjr.. 
reifhed  4.78  in  January,   1210,  and  sinee  then  the 
Hntish    authorities    have    stahilized    or    praetieally 
"pegged"  the  rate  at  ahout  4.70.     This  rate  is  only 
two  per  eent  helow  the  gold   par  of  4.80-.  and   '"s 
known  as  the  "war  par."     The  eost  of  shipping  jr„l,l 
fre  •  London  to  New  Vork,  under  war  conditions,  is 
hel    -en  .seven  and  nine  cents  per  .sovereign  and  the 
above  rate  is  therefore  close  to  the  present  gold  im- 
porting point.     The  \ew  Vork  quotations  for  ster- 
Img  for  the  past  three  or  four  years  given  on  page  207 
should  he  refcrrtd  to. 

7.  Great  Hritain.~\Ve  have  dealt  fullv  with  the  ex- 
eliange  relations  between  London  and  New  Vork  and 
wdl  now  briefly  review  the  other  exchanges.  Roughly 
speaking,  sterling  exchange  has  been  at  a  premium  in 
all  belligerent  countries,  and  at  a  discount  in  all  neu- 
tral countries.  The  positions  ■^t  the  beginning  of  the 
war  have  been  reversed  in  most  instances  and  Great 
Britain,  formerly  the  general  creditor  nation,  has  be- 
come a  debtor  to  Switzerland,  Spain,  Holland,  Sean- 


266 


DOMESTIC  AND  FOREIGN  EXCHANGE 


dinavia  and  tlie  United  States,  this  being  due  in  great 
measure  to  a  decrease  in  her  exports  and  foreign  in- 
vestments and  an  increase  in  her  imports,  principally 
of  provisions  and  war  supplies  from  these  neutral 
countries.  On  the  other  hand,  Great  Britain  has 
greatly  increased  her  exports  to  her  Allies,  while  their 
exports  to  England  have  decreased  materially;  conse- 
quently sterling  exchange  is  at  a  premium  in  France, 
Italy,  Russia,  etc. 

A  study  of  the  following  table  shows  the  value  of 
the  pound  sterling  in  different  countries  from  July, 
1914,  to  January,  1917.  A  comparison  of  these  rates 
with  the  pai  value  of  the  £  in  the  first  column  will 
show  when  the  London  exchange  was  at  a  discount  or 
premium. 

When  war  became  imminent,  France  proceeded  to 
realize  on  her  securities  and  call  in  her  foreign  bal- 
ances; as  a  result  funds  in  London  and  New  York 
were  rapidly  exhausted  and  debtors  in  London  who 
were  under  obligation  to  remit  to  Paris  sent  gold  un- 
til tile  French  moratorium  was  declared.  There  were 
practically  no  quotations  until  the  middle  of  August, 
by  which  time  the  rate  had  risen  to  Fes.  24.50,  falling 
again  in  September  to  p^cs.  2.5.70  and  rising  to  Fes. 
25.04  in  December,  1914.  In  the  spring  of  1915,  the 
effects  of  the  heavy  financing  of  the  British  govern- 
ment for  French  account  commenced  to  be  felt,  and  by 
June,  the  quotation  had  fallen  to  over  Fes.  26,  stand- 
ing in  January,  1916,  at  Fes.  29.85,  and  on  January 
4, 1917,  at  Fes.  29.81 ;  this,  not  withstanding  the  heavy 


WAR  AND  THE  EXCHANGES 


S67 


=  -  ,T ::: .« 


-  S  2  S        S 

^'     c, ;;  eij  s  =  1 5  *■ 

5  •-;  06       a>  ■;<       —  S 


1 

Low 

25.08 
24.80 
25.87 
23.90 

n. 

10. 
Ifi.fiO 
4.50 

J 

a: 

■fl 

•^ 

Hi; 

9) 

-fl                                                          s^ 

Ho. 

'" 

|»SSgS2    ^i 

Q^-* 

f" 

SSS§S"3S2'* 

S-.K 

s 

"^ 

tK 

P^ 

r 

g  .  .  .as   ss 

6. -5 

<! 

3SS33  =  ?£* 

o"> 

o 

!X 

•g,S  .Sgg    S  = 

3 
< 

=  «ss;?a«£» 

5S 

b-' 

>rl 

-f,    »-  ®  «  '0  r;»  o  «?  I^" 

u>< 

_>. 

;;  «  ^  ot  o  1-.  S ':» X 

gd 

-5 

2SS«?5i2;g£-*' 

-<:-» 

S 

n»  -^  2*  i^i  o  cs  CD  S" 

o 

Gj  e»  rM  oj  ^  cs  i:  i 

X 

tfi  «3  u^  o  n't  ^  ac  hI 

I-  e*  o*  0(  o»  ^  5  "  ^ 

fc'fe3£:Ea:^<5 


.  c 


E     ^ 


cu  X  «  S  <  a.  X  >: 


«68      DOMESTIC  AND  FOREIGN  EXCHANGE 

expenditures  on  the  British  and  Canadian  troops  en- 
trenched in  France  and  Flanders. 

8.  Dutch  exchange. — No  specific  particulars  re- 
garding the  excliange  or  financial  operations  of  neu- 
tral countries  with  the  belligerents  are  obtainable, 
nor  will  they  be  until  after  the  war  for  obvious  rea- 
sons. It  is  therefore  idle  to  attempt  to  explain  the 
position  of  the  foreign  exchanges  except  in  general 
terms,  as  the  several  rates  do  not  by  any  means  repre- 
sent either  the  financial  positions  of  the  countries  in 
question  or  their  true  relation  to  each  other.  Take, 
for  instance,  the  case  of  Holland,  which  appears  for 
the  time  to  have  taken  London's  place  as  the  interna- 
tional clearing  house.  According  to  the  Economist, 
the  Amsterdam  exchanges  stood  as  follows  in  No- 
vember, 1915: 

Prdtiium  on 

Kate  Par  Dutch  Currency 

Berlin     IS.OJl^  S!).26  19 

Vienna    :H.0fii4  50.41  3J1A 

Copenliagen  CtXCti  66.(57  ^it 

London  11.23  ij.n  71? 

New  York  7J9.65  J48.8  3.)? 

It  will  be  noticed  that  even  the  dollar  was  at  a  dis- 
count; Dutch  currency  has  apparently  become  the 
standard  of  value  for  tiiese  centers,  and  the  exchange 
markets  of  Holland  and  Scandinavia  have  become  of 
importance  as  international  clearing  houses  and  for 
the  time  being,  are  taking  the  position  generally  oc- 
cupied by  London. 

The  par  rate  between  Amsterdam  and  London  is 
Fl.  12.107  to  the  pound  sterling,  and  the  rate  obtain- 


WAR  AND  THE  EXCHANGES  369 

ing  just  before  the  war  was  a  little  in  favor  of  Lon- 
don  Fl.  12.14.  During  the  first  week  of  August,  the 
quotations  were  most  irregular,  ranging  as  thev  (hd 
from  F  .  11.90  to  Fl.  12.60.  hut  after  the  steadying  of 
the  exchanges  by  the  remedial  measures  ab^ve  re- 
ferre<  to.  the  rate  on  London  was  fairlv  well  main- 
tamed  around  normal,  until  191.3.  when  payments  for 
freight  and  large  purchases  by  the  British  goyernment 
of  sugar  and  other  supplies,  together  with  the  sale  of 
securities  in  New  York  and  London,  presumably  for 
Uerman  account,  combined  to  lower  the  rate  of  the 
pound  to  Fl.  10.85,  the  quotation  on  the  1.5th  of  Janu- 

y'^'^'t,  ^"  ^^^  **''  °^  •^"""^'•y'  ^917.  the  rate 
stood  at  H.  11.69. 

9.  Exchange  in  other  countries.— Since  the  begin- 
ning of  the  war.  the  Italian  exchange  has  been  fayor- 
abJe  to  London  and  during  the  summer  and  fall  of 
1915  stood  at  about  lire  26.  The  rate  rose  a  little 
m  December  but  dropped  again  on  the  prospect  of 
Italy  s  participation  in  the  war  and  stood  at  about  lire 
28  until  June.  1915.  from  which  time  it  has  been 
gradually  rising,  and  on  the  15th  of  January  1916 
reached  lire  32.35.  On  the  4th  of  January,  ig'l?  the 
rate  was  lire  32.78.  ' 

The  Russian  rate  of  exchange  before  the  war  stood 
at  about  94  roubles  per  £lO.  Since  then  the  rate  has 
gone  steadily  against  Russia,  reaching  as  low  as  163 
roubles  per  £lO.  This  is  due  to  the  almost  complete 
blockade  of  Russian  exports,  both  from  the  Black  Sea 
and  the  Baltic,  and  to  a  large  increase  in  the  value  of 


!>70      DOMESTIC  AND  FOREIGN  EXCHANGE 

imports,  tho  a  certain  amount  of  this  depreciation  is 
(iue  to  the  expansion  of  the  paper  currency.     The  rate 
on  the  4th  of  January,  1917.  was  1«3  roubles  per  £lO. 
Spain  was  favorably  affected  by  the  war  as  far  as 
exchange  conditions  were  concerned.     Sterling  ex- 
change is  almost  invariably  at  a  premium  in  Spain. 
Just  before  the  war  it  stood  at  26.10  pesetas  per  pound 
sterling  ( par  2.5.'22)  and  during  the  first  part  of  Aug- 
ust fluctuated  between  pesetas  23.8.5  and  pesetas  26.60 
per  pound,  the  higher  quotation  being  of  course  in 
favor  of  Great  Britain.     Heavy  purchases  by  France 
and  England  of  war  munitions  and  provisions  turned 
the  exchange  in  favor  of  Spain,  where  it  has  remained 
ever  since,  and  England  has  even  fonnd  it  necessary 
to  ship  gold  to  Spain  from  time  to  time  in  order  to 
keep  the  rate  adjusted.     The  rate  on  the  4th  of  Janu- 
ary, 1917,  was  22.30  pesetas  per  £. 

The  position  of  the  Scandinavian  nations— Norway, 
Denmark  and  Sweden— was  very  similar  to  that  of 
Holland,  being  adjacent  to  both  Great  Britain  and 
German  .  Under  normal  conditions  the  Scandma- 
vian  nations  are  generally  indebted  to  Great  Britain 
rtnd  at  times  lean  heavily  on  London  for  financial  as- 
sistance. At  the  beginning  of  the  war  exchange  was 
in  favor  of  London,  standing  at  K.  18.25  as  against 
the  par  of  K.  18.16,  and  remained  favorable  well  mto 
191.5,  when  it  fell  as  low  as  K.  16.60.  The  fall  was 
due  to  a  number  of  causes.  England's  exports  to 
these  countries  had  practically  ceased  while  her  im- 
ports from  them  had  increased.     Russian  purchases 


WAR  AND  THE  EXCHANGES 


a7i 


in  these  countries  were  paid  by  draft  on  London  and 
large  amounts  were  also  due  from  Great  Britain  for 
freight  and  the  like. 

10.  New  Fo/-A'.— Owing  to  abnormal  conditions  in- 
duce<l  by  the  war  New  York  has  gradually  been  forced 
to  assume  the  position  in  international  finance  and  ex- 
change heretofore  almost  exclusively  occupied  by 
London,  and  a  wide  demand  for  dollar  exchange  and 
dollar  credits  has  developed.  The  relations  between 
London  and  Xew  York  have  been  dealt  with  in  a  pre- 
ceding section  and  it  is  necessary  only  to  dwell  briefly 
on  some  of  the  other  exchanges.  On  the  chart  f)p- 
posite  page  2.58  will  be  found  the  New  York  rate  of 
exchange  with  the  different  countries  since  1914  and 
these  should  be  compared  with  the  more  recent  rates 
given  below. 

The  closing  prices  on  the  13th  of  January.  1917, 
for  the  principal  exchanges  quoted  on  the  New  York 
market  were  as  follows: 


Great  Britain  sover    Tti 

Frunce    frur 

Germany    mar'. 

Italy    lire 

Kussia    rouLIes 

Austria    kronen 

Brazil    milreis 

Holland    jfuilders 

Switserland    francs 

(}reece    drachma 

Argentina    pesos 

Sweden    kroner 

^pain    pesetas 

XVII— lU 


Rate 

Jan.  13, 

Par 

1917 

4.8()(i5 

4.75HO 

3.1826 

5.84% 

95.28 

69.34 

i.l836 

6.9314 

51.45 

29.30 

2o.3e 

11.36 

3.'.  16 

23.75 

40.19 

40.81 14 

5.I82S 

5.03 

19.395 

20.00 

42.44 

44.62^^ 

20.'i9 

29.40 

19.20 

21.90 

Discount 

2.2% 
12.7% 
27.370 
33.8% 
13.1% 
44.9% 
26.8% 
l*remi«ni 

1.5% 

3.0% 

3.6% 

5.1% 

9.7% 
10.4Jb 


«7»   DOMESTIC  AND  FOREIGN  EXCHANGE 

It  will  be  noted  that  exchange  with  all  belligerent 
nations  is  at  a  discount,  and  at  a  premium  with  all 
neutral  nations  with  the  exception  of  Brazil  or,  con- 
versely, the  dollar  is  at  a  premium  in  all  belhgerent 
countries  and  at  a  discount  in  all  neutral  countries. 

Tlie  exchange  b-tween  New  York  and  Paris  calls 
for  very  little  comr  ent.  At  the  beginning  of  the  war 
Xew  York  was  largely  indebted  to  Paris  for  stock 
purcliases  and,  as  with  London,  cable  remittances  be- 
tween New  York  and  Paris  rose  to  unprecedented 
heights,  resulting  in  the  complete  breakdown  of  the 
exchanges.  As  will  be  seen  by  the  chart,  French 
exchange  has  acted  thruout  in  sympathy  with  sterling, 
maintaining  a  slightly  higher  level  until  February 
after  which,  tho  still  following  the  line  of  the  ster- 
ling curve,  it  reached  much  lower  levels  of  deprecia- 
tion, touching  fourteen  per  cent  discount  in  August, 
1915,  or  more  than  double  that  of  sterling. 

The  extreme  sympathy  of  the  French  and  English 
exchanges  is  due  to  the  fact  that  Great  Britain  has  in 
a  great  measure  borne  the  financial  responsibility  of 
the  American  exports  to  France,  the  adjusting  pay- 
ments being  made  between  Paris  and  London. 

The  discount  on  foreign  money  or  premium  on  the 
dollar  means  that  exchange  on  New  York  is  difficult 
to  get,  as  there  is  not  enough  to  supply  the  needs  of 
the  foreign  centers,  and  consequently  the  cost  of 
American  goods  to  the  foreign  purchaser  is  cor- 
respondingly increased.  Normally  the  situation  en- 
courages exportation  from  the  country  in  question  to 


WAR  AND  THE  EXCHANGES  273 

IhP  V;''*;'^,^*'^*^^  ""<J  discourages  in.portatio,.  fro,.. 

he   United  States.     This  is  the  uatLl  e,„recti  e 

or  adverse  halanees.     Take,  for  instance.  G,eat  IWt 

fl.n;  under  war  conditions  her  ahiJitv  to  export  L 

greatJy  reduced,  but  her  nee<l  to  in.po,,  i,  va  t^in 

l/r  ?«f  .'*"'"  *"•"  ""practicable,  and  fron.  the 
Umted  States'  point  of  view,  undesirable,  r,..  ' 
these  e„nd.t.ons  the  United  States  the.-ef„re  had  either 
to  extend  credit  or  stop  exporting.  The  And..- 
French  loan  was  the  first  large  loan  and  sin.ilar  oans 
m  add.fon  to  gold  ship„,ents  will  be  found  neci  "" 
from  t.n.e  to  time  in  order  to  n.aintain  the  rate  ' 

press"t!  r"""'"'"'  ^"  '""^  «'^'^"  "'  the  financial 
press  to  the  appreciation  of  the  American  dollar  as 
ompared  w.th  other  exchanges,  particularlv  with 
those  of  belhgerent  nations,  but  little  or  no  con.n.ent 
IseinnjTi'  T"''"^  ''''  depreciation  of  the  dollar 
neutra  nations,  ^s  a  matter  of  faet  the  dollar 
reached  a  lower  discount  in  Holland  than  that  vet  at- 

"  t  T/th""^  "':  \'^  ^°""'  ^*^^''"^'  — >''  "^- 

lar  in  both  S       /^"      J"r  ^'''"  °"  P"^^  ^71  the  dol- 

H  1?  ^  r!.'"  ""'^  ^P^'"  ''''''^'  ^^^"  this  rate. 

on^h    Ten      '  ^r'""'"  ^"'  Switzerland,  borders 

Wth  both    ir      rT'^'  ^"^'  ^^"'^^  «"  ''-'"-s 
H  .th  both.     It  ,s  not  only  a  great  maritime  power  but 

LTk.r     ^f^'.'-"*''^'-  t''^"  «f  «  protectionist  nature! 
l^.ke  Great  Britain,  these  two  features  make  her  ports 


il'i      DOMESTIC  AND  FOUEKJN  EXCHANGE 

vast  clearing  houses  for  cargoes  from  all  over  the 
world,  especially  lor  goods  from  the  East  Indies,  such 
as  sugar,  spices,  coffee  and  tobacco.  In  addition 
many  of  Germany's  direct  imports  are  routed  thru 
the  wonderful  Dutch  canal  system.  During  the  first 
part  of  the  war  Holland  uncjuestionably  exported  a 
vast  quantity  of  both  home  and  foreign  goods  into 
Germany,  especially  from  the  United  States.  Her 
imports  from  that  country  for  the  year  ending  June, 
1915,  showed  an  increase  in  value  of  over  $13,000,000 
over  the  corresponding  period  of  last  year.  The  Brit- 
ish blockade  in  this  connection,  however,  was  so  thoro 
that  Holland  found  her  own  recjuirements  jeopard- 
ized, and  the  Netherlands  Overseas  Trust  was  incor- 
porated. The  guarantee  of  this  company  as  to  the 
destination  of  any  cargo  was  accepted  by  the  liritisli 
Government.  Holland,  however,  continued  to  export 
large  quantities  of  her  own  products  into  Germany 
and  apparently  received  payment  in  American  securi- 
ties, judging  from  the  large  number  of  these  securities 
disposed  of  by  Dutcli  interests  in  New  York,  tlius 
creating  a  large  balance  in  favor  of  Holland.  These 
were  supplemented  of  course  by  gold  shipments  from 
(Jermany,  the  latter  being  reflected  by  the  large  in- 
crease in  gold  holdings  of  the  Netherlands  banks. 
Notwithstanding  these  correctives  the  German  mark 
in  Holland  continued  for  some  time  at  a  discount  of 
about  thirty  two  per  cent. 

11.  Canada. — As  New  York  is  the  exchange  cetitt  i 
of  this  continent,  foreign  exchange  conditions  in  Can- 


WAR  AND  Tin:  KXCHANGKS 


t-r. 


mla  since  the  beginning  of  the  war  Imve  been  a  reflec- 
tion of  those  experienced  i.i  the  United  States  The 
quotations  f„r  sterling,  francs,  etc.,  differ  fn.n.  tlu.se 
m  New  York  only  by  the  discount  or  preiniun,  „b- 
taining  on  New  York  fun<ls  in  Canada.  (Jnlv  a  b-ief 
reference  to  the  latter,  therefore,  is  awssary 

Under  normal  conditions,  gokj  can  l)e  tninsfcrrcd 
hetvveen  \ew  York  an.l  Montreal  for  about  70  cents 
per  .«fil,000  or  •;,;,  of  1  per  cent  on  either  side  of  par 
but  since  the  war,  gold  sliipments  have  practically 
been  discontinued  and  the  quotations,  without  this 
steadying  influence,  have  ranged  from  I'i  per  cent 
(bscouiit  to  1  per  cent  premium. 

Canadian  funds  in  Xew  York  were  therefore  at  a 
premium  during  the  first  few  montlis  of  the  war  but 
in  sympathy  with  sterling,  fell  to  par  in  November 
and  to  a  discount  in  December,  and  remained  at  a  dis- 
count until  August,  191.5,  when  the  proceeds  of  the 
I  nited  States  loan  to  Canada  of  $45,000,000  became 
available.     In  conjunction  with  a  number  of  loans 
made  by  Xew  York  to  Canadian  municipalities  and 
others,  this  loan  was  suflScient  to  maintain  the  rate  at 
about  par  for  the  remainder  of  the  vear.     Since  ihen 
however,  Canadian  funds  have  been  more  or  less  at  J 
discount  in  Xew  York;  or  conversely,  Xew  York 
funds  have  been  at  a  premium  in  Canada,  tho  toward 
the  end  of  1916  they  fluctuated  for  several  months 
around  par.     The  course  of  exchange  between  the 
United  States  and  Canada  and  the  financial  relations 
obtainmg  between  the  two  countries  have  been  so 


«76     DOMESTIC  AND  FOREIGN  EXCHANGE 

fully  dealt  with  in  the  press  that  it  is  unnecessary  to 
enlarge  further  upon  the  situation. 

12.  G'er/nan//.— CJernian  exchange  from  the  com- 
mencement of  the  war  has  been  a  very  complex  sub- 
ject, and  is  apparently  a  study  in  economics  rather 
than  in  exchange,  especially  )  far  as  New  York  is 
concerned. 

Practically  no  mark  quotations  were  available  for 
the  first  six  weeks  of  the  war  or  until  about  the  midtlle 
of  September,  and  from  that  time  on  a  steady  fall  in 
the  value  of  the  mark  set  in.  A  few  temporary  im- 
l»roven)ents  occurred,  but  these  were  immediately  fol- 
lowed by  still  further  deprciation. 

As  (Germany  and  her  Allies  have  been  practically 
cut  off  from  any  direct  trade  with  the  United  States 
it  is  plain  that  the  excessive  depreciation  of  the  mark 
is  not  due  to  the  reasons  responsible  for  the  fall  in  the 
value  of  the  pound  sterling  and  the  franc,  namely,  ab- 
normal imports  of  munitions  and  produce. 

As  a  matter  of  fact  the  German  mark  is  now  uni 
versally  at  a  discount,  but  this  is  not  the  case  with  the 
franc  or  pound  sterling.  In  January,  1910,  the  mark 
was  quoted  in  Amsterdam  as  low  as  42  florins  per  100 
marks  against  a  normal  (juotation  of  .59  florins;  a  dis- 
count against  lierlin  of  nearly  29  per  cent. 

The  cause  of  this  universal  depreciation  in  value  of 
the  mark  cannot  be  found  in  exchange  conditions. 
By  some  it  is  ascribed  to  the  decline  in  Germany's 
credit  due  to  the  lack  of  confidence,  even  among  neu- 
tral and  friendly  nations,  as  to  her  future  financial 


WAR  AND  THE  EX(HAN(;KS  a77 

stability.  At  the  l)eRinninK  of  neccmher.  1910.  the 
mark  was  quoted  in  Aijisteidarn  at  82'''.  per  cent  dis- 
count in  .Switzerhnul  at  31'/.  per  cent,  in  Denrnnrk 
at  30/.  per  cent,  and  in  New  York  at  29'/,  per  cent 
discount. 

18.  The  Svatidinavian  Vnion.-'Vhc  Scandinavian 
Union  IS  a  monetary  and  commercial  union  of  the 
three  kingdoms  of  Denmark.  \or«av  and  Swcdu, 
A  fflancc  at  tlie  map  of  Europe  will  shr)w  the  unicjiic 
position  of  these  countries  as  re^ranls  (Jreat  Hritair 
and  Germany.     They  form  as  it  were  a  little  nest  of 
neutral  nations  within  easy  <listance  hv  water  of  hoth 
Notwithstanding  their  favorable  position  in  regard 
to  trade  with  the  belligerent  nations,  the  Union  was 
seriously  affected  by  the  declaration  of  war  and  had  t<, 
face  abnormal  conditions  from  the  outside.     Thest 
were  due  principally  to  the  difficulty  of  obtaining  st.  • 
ling  exchange  to  meet  obligations  for  imports  a,^ 
other  indebtedness  maturing  in  England,  and  even  the 
great  increase  in  their  exports  faile.l  to  correct  the 
exchange.     Sweden  declared  a  moratorium  on  Aug- 
ust 7,  1914,  Denmark  on  August  21,  and  Norway  on 
August  25.     Notification  was  given  by  the  latter  "that 
the  Bank  of  Norway  would  not  redeem  notes  in  gold. 
The  monetary  system  in  the  three  countries  has  as 
its  unit  the  krone  at  a  par  value  of  2(i.797  cents  f>r 
Is.  IVA.    Both  London  and  Copenhagen  (piote  on 
a  basis  of  kroner  per  pound  sterling  (par  K  18.l(i  per 
pourid).     Any  increase  in  the  rate  would  lie  in  favor 
of  England  as  she  woultl  receive  more  kroner  per 


ie78      DOMESTIC  AND  FOREIGN  EXCHANGE 


pound.  This  would,  therefore,  operate  against  the 
Union.  In  Copetiiiaj^en,  just  before  the  wur,  the  quo- 
tati(»n  stood  at  K.  18.30,  rising;  on  i\ugust  1  to  K 
18..50  and  subsequently  reaching  as  high  as  K.  19.70. 
In  Norway  and  Sweden  the  rates  run  practicallv  con- 
currently with  Denmark.  In  view  of  the  difficulty 
of  remitting  to  London  under  these  circumstances, 
even  f«)r  indebtedness  incurred  since  the  war  com- 
menced, various  expedients  were  adopted  by  some  of 
the  banks.  The  most  general  nietho<l  was  to  credit 
the  proceeds  of  the  colle'!tion  to  a  kroner  account  in 
the  name  of  the  .'  /reign  bank,  leaving  to  the  latter 
the  problem  of  realizing  the  amount  in  home  funds. 

British  trade  with  these  countries  fell  oft"  to  a  great 
extent,  due  to  the  exchange  situation  as  well  as  to  the 
more  attractive  '  prices  which  (icrmany  was  forced  to 
offer.  There  is  no  doubt  that  the  risk  of  transpor- 
tation owing  to  mines  and  submarines  also  acted  as  a 
deterrent. 

As  regards  the  trade  relations  of  these  countries 
with  Germany  direct  information  is  naturally  not 
available.  It  is  well  known,  however,  that  Germany 
has  imported  not  only  vast  quantities  of  the  products 
of  the  Union,  but  also  immense  quantities  of  cotton, 
wheat,  etc.,  originating  in  other  countries,  particularly 
the  United  States.  The  latter  conclusion  can  be 
formed  by  reference  to  the  export  reports  of  the 

1  The  CopenhBgPii  correspondent  of  the  Economist  points  out  tliiit  tlif 
effect  on  tliHt  mnrlcet  of  a  prcniiiiin  of  .'i  per  cent  on  the  pound  sterlinR 
und  a  discount  of  7  per  cent  on  llic  iiiarl*  as  compared  with  the  Danish 
currency  was  to  turn  Danish  trade  from  England  to  Germany. 


WAH  AM)  TIIK  KXIHANOKS  )|79 

United  States.  Xorwny.  for  instancr,  for  the  year 
cndiiix  June,  191.5,  imported  from  tlie  I'nited  .States, 
K(K,ds  to  the  value  of  $3»,07.>.000,  as  against  oidy  $0.- 
7(M),000  tl)e  previous  year.  Swe<len.  for  the  "same 
periwl,  shows  $78,274,000  as  against  only  ))(U.(!44,000 
ia  1»14.  These  amounts  are  out  of  all  proi)ortioi'i  to 
the  amounts  «iven  for  home  eonsumption. 

German  exchauKC  as  elsewhere,  was  at  a  heavy 
'llseount  and  Germany  etideavore<l  to  correct  it  with 
Kold   shipments   from   time   to  time,   but   the  effect 
was  only  temporary  and  she  was  finally  forced  to  pay 
for  her  .Scandinavian  purchases  in  Rold.     An  inter- 
esting side-li«:ht  on  these  K<>Id  payments  was  the  re- 
appearance in  London  of  a  lar«e  number  of  the  sover- 
fifrvs  known  to  have  formed  part  of  the  German  war 
chest  -it  Spandau  and  which  were  allocated  for  that 
purpose  out  of  the  French  war  indemnity  of  1872. 
These  sovereigns  were  not  only  identifieil  by  their 
date  and  design   (Victoria  effigy  "shield  reverse*!") 
hut  some  of  the  coins  were  received  in  London  from 
Scandinavia  in  the  identical  labeled  bags  in  which 
they  had  been  dispatched  from  the  Bank  nf  England 
to  Germany  for  P'rench  p  x-ount  forty-three  years  ago. 

nEVIEW 
What  has  been  the  effect  of  war  on  international  e«han«? 
countries'?*  '  "°"*°"""'  """^  «'''>'  ''«'  >'  l^en  applied  by  most 
What  tendency  toward   fluctuation   do  exchanges  show  under 


280      DOMESTIC  AND  FOREIGN  EXCHANGE 

Discuss  the  exchange  relations  between  London  and  New  York 
as  a  result  of  tlie  war  and  describe  the  corrective  measures  which 
were  introduced. 

What  effect  has  tlie  war  had  on  commercial  exchange  in  neu- 
tral and  in  belligerent  countries? 

Discuss  foreign  exchange  conditions  in  Canada  since  the  begin- 
ning of  the  war. 


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INDEX 


Unarm   of   ir«4U   is    Loa4oa,    13il- 

aV,    143;    Dr«ri   In    Undon.    Uu. 

In  Ufrmtay,  :U-tS 
•Vr*  kIm>  boUar  AcceutftncM 
AtUttt|>, 

Uraiiilion   of.    155;    TraoMclion   rx- 

pUinod,     135-57;     P.rilic.,     labl. 

for,     I57-5H;     Riork     p.rllj,      I5H. 

Ctiain    rul«    calculatioo,     159-00; 

Bxampla  of  fimplc,   100-63 ;  Com 

pound     arbilrago     prublpm,     162- 

64;     Gold     ihipnarnta,     triangular 

oprrallon  for,  164-65 
AtiaoUaa, 

Currfocr    and    fold    ataDdard.    23«; 

Lagal     If  odor,      230;     Quotatiooa. 

230 

Bukan'  iMt  BUIa, 

form   of  draft.   01,    »7,    101;    nalaa 

of  intarnl.  166-67 
Stf  alio  Long  Exchange 
Bank  of  *«*glani1  MmIU, 

Importance    of.     1611-70;     Mluimum 
diicountt.  171 ;  MargraS  on.  171- 


Bank  of   England  flxei,    le7-«8 .    In 
N«w  York.   168 

BUla  of  Bxctaaf  a, 

Gold  rrdrniplion  for.  illuitralod.  46- 
47;  Short  and  long  rxrhang«.  89- 
00;  Sight  drafta,  90-93;  Purcbaa- 
ing  damand  drafu.  91-94.  Ca- 
bloa.  abnormal  ratea  for.  04-96; 
long  lime  drafU.  96-106.  Api>U' 
cation  of  intereat  rate.  9rt-l00; 
Commerrial  long  billa.  100-01  ■ 
Bankera*  long  billa.  101;  Pur', 
chaae  riaki,  102-03;  Commercial 
credit  application  illuatrated.  103- 
06;  Letters  of  credit,  fii:u;-  of 
106-08;  Ooir  •  -cial  biUa  of  ai' 
change.  12,  ;  ;  Purchase  of. 
198-200;  Sterling  exchange  ubie. 
198:  Examplea  of  rate  calcula 
lion.  ln<i-;oO;  Foreign  quota- 
tiona.  229-30 

BraiU, 

Goiernment  notes.  230:  Paper  mil 
rris  depreciation.  ■.>'<0-32;  Export 
and  import,  231-'.^ 


283 


Oablaa. 

I.l.ulity  to  chacka,  04;  Ratea  >inca 
the  v«ar.  95;  Summary  of  condi 
tiou*  b)   Uargrair.  95  00 

Ohaln      Rula     BzchaDga     Calculation 
150-60 

OhUa. 

r«|»r    .landarj.    ■.•:|(I ;    K„i,.,    i„u,4 
against  gold,  230-:i7 
Oblna, 

Nil'er  alandard.  233 .   Value  of  taela, 
233-34 
Circular    Motae.    Porm    of    remittance. 

it2.   83 
Clara,  Oaorga,  Author  of     Foreign  Ex 

rbangi','    145 
Oolaaga  RaUa, 

Oistinguiahiug  exchange  ratea.  60; 
•'rice  of  soviTi'igim  at  U  S.  mini. 
50:  Uold  eagles  in  England.  60; 
»alue  of  gold  in  Great  Britjin. 
ia«.  laO;  In  United  Slates. 
189,  100;  Uint  par  calculation. 
324-2u;  Value  of  foreign  coins, 
281-86;  Moneya  in  use.  387- 
01 
Coamarclal  Lattan  of  Credit, 

Form  of,  105,  106-07;  Bank  ia- 
auaoce,  107;  Importance,  108; 
Method  illuatrated,  118;  Adsao- 
Uge  to  Importer.  137;  Foreign  ex- 
change  and  importa,  137-43; 
Granting  acoeptancea,  138-39 
Comnarclal  Loof  Billa, 

On     foreign     debtors,     07.     lOO-Ol- 
Payment    billa.     100;     Acceptance 
bills.     101;     Commercial    bilU     of 
exchange,  128-39 
Stt  also   Lung  Exchange 
OonTaralon, 

When  necessary.  55-56;  Rule  for 
Jxed  exchange,  56;  Dollara  into 
foreign  currency.  56;  Foreign 
currency  into  dollara.  57;  Rule 
for  moTable  exchange.  67;  Dol- 
lars into  franca.  57;  France  into 
dollars.  67;  Exchange  tables.  69; 
Demand  sterling  sold.  110: 
Sterling  rxrhange.  195-97:  Franca 
into  dollars.  206.  207;  Frac- 
tional qunlstion.  =06-07-  Oorman 
rulea.  217-18;  Dutch  exohance 
223  ' 


894 


INDEX 


Country  Obedn, 

Collection  methods,  lH-19;  branch 
t>anki>  needed,  19 ;  Federal  He- 
»ervt)  system,    19-31 

Courso  of   Exchange, 

London  qiiolatioii!..  191.  194;  Royal 
Kxrhange  nu'Uiods,  193;  When 
two  rates  are  quoted.    195 

Crossed   CbecJc.    itankiDt;   practice   lor, 
111 

Currency  Shipments, 

Denver  to  New  York.  7-11:  Main 
taining  balances,  8-9,  17;  liu^iea 
of  coat,  9;  Gold  shipnaents.  9-10, 
16;  Sub  treasury  setlleraeiits.  12. 
Siip|ily  and  demand,  14-15;  Gold 
Kettlementfl  and  Federal  Reserve 
bankn,  30-31;  Expense  of,  S4~ 
35 

Demand  and  Supply, 

Shipping  currency,    7-«,    10-11;    Kx 
change     adjuntments.     13-15;     Af- 
fects  rates,    16 
Documontary      BiUa.      Protection      of 

buyer.    101.    102-06 
Dollar  Acceptances, 

National    Hank    Act    prohibits.     131- 
nS;    Jacobs    on.    132-33;     Federal 
Reserve    Act    provides    for,    133- 
34 
Dollar  Credita, 

Finnijcing  exports,    130-31;    Imports, 
138 
Domestic  Exchange, 

Definition  of.  1 ;  Illustration,  1-2 ; 
Banks  in  U.  S..  2 ;  Chock  on 
debtor's  bank.  2-3 ;  Collecting  out 
of  town  checks,  3 ;  Correspond- 
ents. 3-4 ;  New  York  the  finan- 
cial center,  4;  NY.  exchange  in 
Denver,  4-8 ;  "Business  man's 
money,"  5 ;  N.  Y.  exchange  il- 
lustrated, 6-7;  Currency  ship 
ments,  7-15;  Rates,  basis  of 
ohnrges,  O-l'J.  16;  Cost  of  ship- 
ping gold.  9-12 ;  Quoted  rates, 
11 ,  MelhodR  of  increasing  de- 
nOHits,  11;  Settlements  thru  sub- 
treasuries,  12;  Demand  and  sup- 
ply, 13-16 ;  When  interest  rates 
rise.  14-15;  Commodity  view- 
poini  of.  15-17;  Determining 
rates.  16 
See  also  Federal  Reserve  Bank 
elearings. 
Draft  iBsaes, 

Prnrtic*'  fur.  62-6";  Demand  drafts, 
02.  90-93;  SterUng  drafts,  64; 
Letter    of    advice.    64-66;    Speci- 


Draft  Issues — continued 

men     forms     S"'*.     -M;5*»ture8. 
Dftermining    fOhJ.    rb  67 ;    S' 
practice   for     lit;    IIi.s*ory    . 
Loudon,    14f       r.ianfe   h  li^ 
50;    German.,    V  15-1(1 

Dutch  Exchange, 

Florin  the  monetary  irDit.  Z'.' ' , 
version.  223-24;  Long  bills. 
Fractional  rates,  224 ;  KiTe 
war  on.  268-69.  a^4 


66: 

IT)  dry 


Con- 

22;t; 

■ct     of 


Bscher,    Franklin, 

Defint'S   finance   bills,   Vf 4 ;    On    Dfal- 
in^  in  futures.    153-54 
Exchange  Quotations, 

Sterling  exchange  •nJversal.  225- 
26:  Unilt'd  Spates  Kui>plyiug  cap- 
ital. 226;    War  affects,   258-79 

Sfc  also  Quotations 

Federal  Reserve  Act, 

Provides  for  bank  aeteptasees.  133- 
34;  Imports,  and  dollar  credits. 
13H ;  InternatioHal  Banking  Cor- 
]>oration,  244 

Federal  Reserve  Bank  Clearings, 

Country  checks,  18-24;  Bram'h 
banks  needed,  19;  Federal  Re- 
serve syHtera,  19-20;  Act  of  1913, 
20-21;  Checks  for  tollection.  21- 
32 ;  Chicago  bank  schedule.  22 ; 
Member  banks  matntain  balances, 
22-23;  Indorsement  and  presenta- 
tion. 23-24;  Presentation  of 
check  thru  mail,  23-24;  Colbc- 
tion  charges,  24-21;  N.  Y.  Clear- 
ing House  rates,  25-26;  New 
ruling  of  Clearing  House  Asso- 
ciation, 20;  Collection  illustrated, 
26-27;  Summary  of  advantages, 
28;  Objections  to  lew  plan.  28- 
29 ;  Success  of  system,  29-30 ; 
Gold  Settlement  Fund,  30-31 

Finance  Bills, 

Definitions  of,  varitms,  144-45 ; 
When  exchange  rates  decline, 
145-48;  Use  of  illustrated,  146- 
49;  Loaning.  148-49;  London  ac 
count,  149;  Other  ases,  150;  Re- 
lation to  forward  exchange.  151- 
54;  Kscher  on  fatures,  152-54 
Fixed  Exchange, 

Meaning  of.    54;    Basis  ef,    55;    Con- 
version    for.     56 ;     Arithmetic     in- 
volved,     C8 ;      Sterling     exchange, 
192.    193 
Foreign  Exchange  aad  Experts, 

Definition   of,  32 ;   Xnteaaational  bal- 


INDEX 


295 


Foreign  Ezckuigt — continued 

anc.»,     :)i-33;     Origin    of    foreign 
indoldcdoeg.s,     33;      Principal     „■- 
prations,  33 ;  Inland  exchange  aim 
liar     to.     33-34;     Gold     shipment 
cwjta,    34-35;    Essential    points    to 
stud),  35-36;  Mint  par,  how  com 
puted,    36-3S;    Par    of    exchange. 
3H-39;     Imiiort    and    export    gold 
I.,ints.    39-41;     War    fluctuations. 
41-4'J;     Clearing     house     transac- 
tions,   42-43;    Buying   and   selling 
43-44;    Sterling  exchange    in    New 
York,   44;    Bills   of  exchange,   46; 
Sterling   exchange   rates.    47;    Quo- 
tations   .'>2-54;    Contersions.    rules 
for.    55-58;    Exports    and   importa 
interdeiiendent.      120-22 ;      Visible 
and      invisible      exports.      120-26; 
Origin  and  supply.   122-23 ;   U.  s'. 
in   account   with   the   world,    124- 
27;    Exjiort   and   import,    12'>-26- 
Quotations     by      Marks.      127-28- 
Commercial      bills      of      exchange,' 
128-29;    Dollar    credit    Snancing, 
130-31;      Acceptances,      and      the 
banks,    131-33;    Federal    Reserve 
Act    alfects.     133-34;     Letters    of 
credit,    134-36 
Poreign  Exchange  »nd  Imports, 

Commercial  letters  oi  credit,  137- 
39;  British  acceptance  illustrated, 
138-39;  London  credits,  140-43- 
Lloyd  George  on  British  accep- 
tances, 142-43 
Fonlgn  Honey  Ordera, 

Method    of    remittance.     82;     Speci- 
men   of    sterling   order,    84;    Pay- 
ments,   85-86;  Redemption,   86 
Foreign  Semittuces, 

Tra»el,  and  immigrants'  remit- 
tances home,  61-62,  86:  Draft  is- 
sues. ,-iJvices  (or,  62-60;  Draft 
costs  estimated,  66-67;  Travelers' 
cheeks.  67-74;  Letters  of  credit. 
74-82 ;  Circular  notes.  82,  83 ;' 
Money  orders.  82,  84-86;  Mail 
remittances,  86-88 
Forward  Exchange, 

Relation  Is  finance  bills.    151:   Bank 
methods    to   protect,    151;    Esch-r 
on  trading  in  futures.  152-54 
French  Exchange, 

Example  of.  112-13;  Paris  mar- 
ket, 201;  Latin  Union,  201-02- 
Monetary  system,  202-03;  Stamp 
duty,  203-04;  Rultj  f„r  deter- 
jninins  rnte  of  interest.  204- 
Paris  tjuolBtions.  204-0.-.;  Conyer- 
sion  in  New  York.  20,-»-fifi :  Frae- 
*'">"'  ii'l  't'e  dolhir  amount.  206- 


French  Exching^-continued 

07;  Franc  exchange  table.  206- 
07;  I  rofils,  metho<l  and  buying 
niles.  207-09;  Purehasine  iong 
hill,.,  209-11:  Interest  tabTe  aid' 
calculation.  209-11;  Free  gold 
ninrket.    248  " 

Futures,   -See   Forward   Exchange 

Oeorge.  Lloyd, 

liriti^l,    credits    and    the    war,    142- 
43;     Britain's    responsibility    cited. 
German  Exchange, 

Illustration  of.  113-14;  Berlin  mar 
"et.  212;  Kinds  of  money.  212- 
.,,i  """I'  duly  circumvented. 
-13-14;  Giro  evnio  system.  214- 
l-aleulating  interest,  214-16- 
Commercial  usages,  215;  Qu„„'. 
tlons.  216-17:  American  quota- 
tions. 216;  Converting  marks  into 
dollars,  217;  Converting  dollar, 
into  marks,  218;  Profits,  219- 
I  urchasing  long  bills,  220-  In- 
terest table,  220-21;  Gold  market, 
-48;  Wars  effect  on,  276  278 
279,  Imports,  278;  Gold  to  Eng' 
land  for  repayment  279 
Hold    Exchange    Basis,     International 

standard.   222 
Gold  Exchange  Standard, 

Local    currency    for.    •..27;     Sale    of 
bills,  228 

Ctold  Points, 

Exchange     rates     for     e  ..d,     39-40- 
Imiiort     and     export     iKjints,     39- 
n  .J     .'   "»"*"  'letween  centers,   41 
Oold     SetUement    Fund,     Federal     Re- 
serve  plan,    30-31 
Oold  Shipments, 

Charges  from  New  York,  9-10' 
Rale  fluctuation,  16-17; '  Federal 
Reserve  settlements,  30-31-  Ex- 
pense of,  34-35;  Gold  point-i,  39- 
40;  Significance  of,  between  New 
York  to  London.  40-41;  Differ- 
ence between  gold  i.oint  and  de- 
inand  rate.  90;  Arbitrage  transac- 
tions. 164-65;  Banking  practice. 
174;  London  and  New  York 
prices.  175-76;  Prom  New  York 
176-77;  New  York  to  Ottawa' 
177-79;  From  Ottawa,  returns  on, 
180-81;  Imports  from  London 
since  the  war.  181-84;  Export 
and  import  rates.  183-84:  Great 
Britain.  248-49:  Prom  New  York 
263;  Thru  Ottawa.  263-64;  Anglo- 
Frenrl,     loan.     264-273;     Louden 


896 


INDEX 


0«ld   Slilpmnkti — coQtiDued 

and    New    York.    2ti'i ,    Oold    pay- 
menu  by  OermaDy,  279 


Indobtadness.  Cause  of,  betwpco  rouD- 

tries.  33 
India,  ExfhangR  sj-Ktem  ia,  228 
Inland  Exchange. 

Similarity    to    foreign.     33-34;     Uni- 
formity   of   chargOH,    35;    Currency 
scltU'tuent   for,    48 
S^f    also    Domestic    Exchange 
ZaviBlbla  Trade, 

Foreign      exchange      methods.       120, 
121-26 ;     Nft     lialance     etatemcHt. 
124-26 :      Exports      and      imiiorts. 
125-126 
Interest,  See  Rates  of  IntereKt 

JftOObS,    L.    H;    on    Bank    acceptances, 

132-33 
Johnson,  Josepb  French, 

Statement  of   U.    S.    in    account   vith 

world.      124-27 ;      Describes     gold 

shipment.   176-77 

Latin  Union, 

French  monetary  Bystem,  201-02; 
Coinage.  202 

Letter     of    Hypothecation,     Documen 
tary  certificate.   113 

Letters  of  Credit, 

Issuance,  74;  Domestic,  74.  77,  7H ; 
Foreign,  74,  79,  80;  Puyment  to 
holder,  81;  Advised  and  circular, 
81-82-  Commercial.  106-08.  137; 
Issue  illustrated,  116;  Payment 
on.  116-17;  Rxami>le  of  export 
letters  of  credit,  134-36 ;  Im 
ports,  137  et  aeq, 
Se«'  also  Commercial  Letters  of 
Credit 

London   jmd   New   York   as   Financial 
Centers, 

Relative  supremacy.  238;  Reasonn 
for  London's  position.  239;  Lloyd 
George's  statement,  239-40;  Lon- 
don's economic  advantages,  240- 
41;  Mail  and  cable  service,  241- 
42;  Time  advantages,  242;  In 
vestment  operations,  243;  Seek- 
ing fortunes  abroad,  244;  Finan- 
cial center  of  British  empire, 
245;  London's  credit,  246;  Eco- 
nomic factors  in  London's  posi- 
tion, 247;  Free  gold  market,  247- 
46.  Liquid  discounting.  249; 
Foreign    bank   policy,    24tf-50;    in 


London  and  New  York — continued 

vetttmenttt  adjust  baluuci-n.  -50 ; 
TarilT  policifs,  251:  Mercantile 
nuvy,  251-52 ;  British  foreign 
iraiie.  252-53;  New  York's  ti- 
uuneial  power,  354 ;  Future  re- 
sponKiliilities,    255-56 

Long  Exchange, 

Bunkers'  long  bills,  96,  101;  Com 
merciul  long  bills,  97.  100;  Do.ii 
mi-niary  bills.  97,  102-06;  Clt-an 
bills  of  exchange,  97.  101;  Fi- 
nance bills,  144-50;  Lo^ig  bills, 
interest  rale  for.  166-67;  Wier- 
liug  rates,  195;  French  long  bills, 
li(l9-J0;  German  interent  table, 
1-20;    Dutch   long  bills,    223 


Mall     Remittances,    Transactions     for. 

Hfi  S8 

Margraff.   A.   W., 

•Summary   of  cable   rates,    by.    95-96; 

On     Bills     of     exchange,     102-03 ; 

Hank     of     England     rate     stated, 

171-73 

Market     Bate,      Discounting     methods. 

l(>H-09 
Mint  Par, 

Monetary  unit  values.  36-37;  How 
roniputed.  37;  Between  two  couo- 
trieH.  38;  Ratio  of  exchange,  38- 
39;  Function  in  exchange  rates, 
49;  How  determined,  224-'2h; 
Metallic  currency  values,  281-9- 
Monetary  System, 

Sovereign  the  unit,  186;  QuotationK 
for  silver.  166;  Deterioration. 
187 ;  French  exchange.  202-03 ; 
Germany.  212-13 ;  Netherlands, 
222;  Mint  par  calculation,  224- 
25;  Phillipines,  328;  India.  228; 
Argentina,  229;  Brazil,  230-32; 
China.  233-34 ;  Great  Britain. 
247-49 ;  Value  of  foreign  coins. 
281-86;  Equivalents  and  money 
values,  287-91;  Symbols.  292 
Money. 

Value     of     foreign     coins.     281-H6 ; 
Monevs    and    equivalents,    287-91 ; 
Symbols,  292 
Moratorium, 

British    credits    and    the    war,    142 ; 
Definition   of,    259 ;    Countries   de 
daring.    260-61,    277 ;    Germany'is 
attitude.  261 
Movable  Exchange. 

When  implied,  54;  Basis  of.  55; 
Conversion  for.  57;  Arithmetic  in- 
volved. 56 ;  Sterling  exchange 
rates,    192,    193 


INDEX 


29T 


N«w  York  s  FInuctal  0«at«r, 

Pusition    after    the    w»r.    238,    256- 
PrMent    dominmco.    254:    Future 
rMponiibility.       255;        Kxchmnge 
with    London,    262-65.    271 ;    Ca 
nadian    exchange,    274-75;    {]     g 
loan  to  Canada,  275 
Now  Totk  Oloartoj  Hona.  Aasoclatlon. 
Bank    rate    ruling,    25-26;    Charges 
illustrated,  26-27 
New  York  Ezchango  in  Dflnrer 

Demand    and   supply.    4-7;    flluatra 

i'°o'  o?"^'     '^"""■'^y     shipment., 
7-9;  Shipment  costs,   10 

Paper  Currencies, 

Value,  and  depreciation,  234-  In- 
teresting problems,  235;  Coun- 
tries on  inronvcrtihl"  paper  basis 
235-36;   Chile.  236 

Paper  Money, 

Bank   of   England    notes,    187,    188  ■ 
Gold  reserve  in  U    S     187 
Parity. 

Quotations  for,  and  arbitrage,  157- 
58;  Stock  prices.  158;  Commodi- 
ties. 159;  Chain  rule  calculation 
159 

'""228"°'      ^'"'"''"     Prae'ices     of. 


Quotatlona. 

Newspaper  announcements,  52;  Ex- 
change quoted  in  N.  Y.  market 
53;  Range  of  units,  53-54;  Doyis 
and  Brooks  on,  54;  Fixed  and 
moveable  exchange,  54-55 ;  Ex- 
change tables,  59,  127  '  192 
Parity  tables,  157.  158;  Foreign 
exchange  in  London,  forms  of, 
191,  192;  Course  of  exchange, 
194;  American,  195;  French  ex 
change,  204-05;  Francs  con 
verted,  206,  207;  Fractional.  206- 
07,  German,  216;  American  216- 
17;  Holland,  222-2:1 
See  also  Exchange  (Juotations 

Bates  of  Exchange, 

Currency  shipments,  9-10;  When 
demand  exceeds  supply,  10-11 
Quoted  rates,  11;  How  deter- 
mined, 16;  Federal  reserve  col 
lections.  24;  New  York  Clearing 
House,  25-26;  DeBnition  of  33- 
Mint  par,  pivotal  point  of,  38- 
38,  Gold  points,  30-40;  Gold  re 
demption    for    bilb    of    exchange 


B«tea  of  Eichange— continued 

I7  tl'  .,?.',"""«  "xchange  cost 
4'-4«:  What  IS  meant  by  48 
Transfer  mediums,  49,  Coinage 
ratio,  50;  nuctuatioris,  50-5'>- 
Rates  correspond,  51-52  News' 
paper  quotations,  52;  Kxehsnge 
'*'"',  ^■'-  R»"8«-  of  quotation", 
oj-84:  Table  shows  profit  54- 
Jixed  and  moveable,  con.-ersions 
for,      54-58;      ,\nlhn,el,c     elemen 

Bn'^'n 'i^  .  °'"'"''"«  '"''l''»'  59- 
00.  Oold  shipments.  174-83;  I.on 
don  quotations,  191-93  .Mov 
able,  192,  193;  Fixed  exchange. 
192.  193:  War  affects.  258-59' 
London  and  New  York  ''6'>-r.-)- 
France.  266;  Dutch.'  26K-69' 
Italy.  269;  Russia.  269-70- 
Spain.  270;  Scandinavia.  270' 
New  Vork.  271-72;  Canada.  273; 
Germany.  276-77,  279 
Bates  of  Interest, 

Exchange  fiucluationa.  166  Com 
puting  long  bills.  166-67;  Hank 
"'"•  J«'-6«:  Market  rale,  168- 
69,  Retirement  rate,  169;  Hank 
of  England  rate,  169-73;  Mar 
graff  on  discount  rule  fluctuation 
171-73;  French  long  bills,  209- 
10;  German.v,  214-16,  Cerman 
table  of,  220;  Dulrh  exchange, 
^n^~^*'     ^*''**     Shipments,     265- 

Bellrement    Bate,     Discounling     bills. 
169 


Scandinavian  Union, 

Monetary    .s,^»lem.     277:     Trade    re 
lations.    27H-79;    Germany's   trade 
with.    278-79 
Sight  Drafts, 

Demand     exchange.     90-94-      .S|.eci- 
men  demand  drafts.  91.   93;    Hank 
transactions,      92,      94;      German 
practice   for,   215 
Silver  Standard. 

Exponents  of,  decreasing,  232- 
China's  .nonetary  s.islem.  233- 
34;    Relative  value  of  coini.   281- 

Sterllng  Exchange. 

New  York  demand.  44;  Cost  of 
4 1-48;  Demand  sterling,  ex 
•mple  of  selling,  110-11;  ster- 
ling purchased,  ln-12;  War 
causes  demand  for.  142;  London 
market.  185-86;  Monetary  sys- 
tem. 186-87;  Paiier  money.  187- 
88;        Gold       coinage.        188-90; 


29« 


INDEX 


starling  Eiciaine— ron"""'* 

Stimpt..  .nd  inl"™t,  190;  Lod 
dm,      quotatioDB,      how      publlshiii 
1111-93;   B»tes   of  exihange,   tabk 
for       191-93;      "Course      of      tn 
.liange."    table    o(    rales.    193-95 
Amencan     quotations.     19o;     tal 
rulatinj       conversions.        195-»  / 
Fisuring    pro6t,    197-98;    Special 
dale    purchases,     table    for.     19»; 
Rate      calculation,      eiamples      of 
199-200;   Adjuatments  thru.  226 
Gold    standard.     227-2«;     I""liP 
jimcs,  228;  India.  22H  ;  A^rgcn.ina 
229-  tireat  britain.  247-52 
Suh-Troasury     SetUamenta,     Currency 
shipment  facilitated.   12 


Tr»Tel«'»  Checks, 

Convenience  of,  67;  Specimens.  68. 
69;  Terms  of  compliance,  70; 
Payment  methods.  70-71 ;  Re- 
iemption,  71-72;  Letter  of  in- 
dication. 72-73;  LosH  risks.  73- 
74;  Negotiability.  74;  Method  il- 
lustrated.  115-16.  117 

Ulltad    SUtes    in    Account    with    the 

Foreign  exchange  statement,  1|!4- 
26;  ExiKirts  and  imports,  lia~ 
27 ;    Quotations,    127 


Vlslhle  Trade, 

Eiports,    120,    125,    126;    Uisparity 


Tltlhle  Trade — continued 

between      importe      aid      experts. 
121.    125 

War  and  the  Exclungel, 

Loudon    credits,    and    imports.    141- 
43;    Gold    imports,    and    Bank    of 
England;     lal-83;     Capital     su].- 
plied    by    United    Slates,    226-27; 
International    exchange,     how     af_ 
fpcted,    238.    257-59;    Course    of 
events      258-59;     Business     |iara- 
Ivzed      259;    Moratoria.    covintries 
declaring.  259-61.  277;   Exchange 
groups,     262;     London     and     New 
York   operations,    262;    Gold   ship 
ments  from  New  York,  263;   Pay 
ments      thru      Ottawa.      263-64; 
Anglo  French      loan.      264;      -New 
York  loans  to  Great  Britain.  -65 ; 
Sterling     exchange     at     I'remmm. 
'>65-66-     French    securities.    ~6li. 
Table    of    pound    sterling    values. 
267-     Dutch     eichaage.     268-09; 
Bates  in  Italy.  269;  Russian  rate. 
269-70;      Sterling     exchange      in 
Spain.      270;      Scandinavian      ex- 
change.    270;     New    York  s    rate 
with   different   nations.   271;    New 
York  and  Paris.  272 ;  Export  and 
imiwrt    needs.    272-74;    American 
dollar,   appreciation  ef.   2"-.H°': 
land's     maritime     trade,     2"""  ■ 
Canada's    foreign    exchange.    274- 
75        Germany's      credit      decline. 
276-77:       Scandinavian       Union. 
277-79:  German  trade  with  Scan- 
dinavia.  278-79 


TBE-PtmPT 


o  N-pa  ass 


JB  W  OOD-U  A  S  S'l 


